Cost depreciation questioned by major lender?

[NC Appraising]

In real estate, depreciation is the process of deducting the cost of a property's building structure, not the land. Why listen to Aloft? land (the site itself) is never a depreciable asset in real estate because it is considered to have an unlimited or "inexhaustible" useful life. It does not wear out, decay, become obsolete, or get used up over time in the way a building or equipment does. Go back to your basics. They are just trying to dazzle you with their BS and new and shiny words they just learned.

I don't use them?

This is basic.

Very simple example. Exact same home, same level of physical depreciation.

Comp 1 located in oak subdivision
Sold 600k
Depreciated cost of improvements 500k. Site value per extraction 100k

Comp 2 located in maple subdivision
Sold 650k
Depreciated cost of improvements 500k.
Site value per extraction is 150k.

Market derived location adjustment 50k.

 

[sputnam]

I am the appraiser. I have spent a lot of years, a lot of time, and a lot of money becoming educated and trained. The Lender... no matter how major... does not tell me what methodology I can and can't use. I will use the methods that the data set supports. Yep, market extraction is better than using depreciated cost analysis that's based on a published cost service. If I find it necessary to base and adjustment on depreciated costs, then I will use that. The Lender can make the loan, or not. They can not tell me how to appraise.

 

[Tom D]

Seriously, when you have plenty of sales, the cost approach is needed? It just leaves you open to another, this ain't done right says the state. The cost approach, especially land value, is one of the #1 da work file fines by da states.

From the Appraising Residential Properties, 4th Edition, Appraisal Institute:
The cost & income approaches to value were not necessary for credible results in this assignment and were not performed.

 

[NC Appraising]

I am the appraiser. I have spent a lot of years, a lot of time, and a lot of money becoming educated and trained. The Lender... no matter how major... does not tell me what methodology I can and can't use. I will use the methods that the data set supports. Yep, market extraction is better than using depreciated cost analysis that's based on a published cost service. If I find it necessary to base and adjustment on depreciated costs, then I will use that. The Lender can make the loan, or not. They can not tell me how to appraise.

I completely agree.

But, one has to question as to why one of the largest lenders in the country would put out a statement to their entire panel?

I have no inside source, just my opinion only.

Within the past year, these push button software deriving adjustment platforms have taken off. Most use cost depreciation.....

So while I agree with your statement, other questions have to be asked.

Is it the software or the methodology? Or when combined, both?

Are the cost depreciation adjustments not aligning with the GSEs adjustments....when the report is uploaded to them?

You see more reports than I do. I can easily spot when the appraiser used this push button adjustment deriving software. Adjustments are bat shet crazy and for everything.

The issue, in my opinion, is that appraisers are just running with it. The software gives them a adjustment and they roll with it....I think the GSEs could have noticed....buy backs, afraid of??

I know, not mine or your problem....but it appears to be a problem for this Lender due to the actions of our peers....

 

[NC Appraising]

Yep, market extraction is better than using depreciated cost analysis that's based on a published cost service.

Sput,

I agree. Market extraction first.

Keep in mind that all are equal....

The sale price of the comp is a fact. You are using the same cost service for all comps...its not like you use ms for one and then craftsman for the other comp.

We are not using the cost approach to place value on the subject property. Just using it to derive adjustments.

True, depreciation is a judgment call in the cost approach. But so is labeling comps c3 or c4. It is also a judgment call (based on data) on how much of a condition adjustment to apply to a comp. How much physical depreciation a comp has is a judgment call...and opinion.

 

[Sadie]

I don't use them?

This is basic.

Very simple example. Exact same home, same level of physical depreciation.

Comp 1 located in oak subdivision
Sold 600k
Depreciated cost of improvements 500k. Site value per extraction 100k

Comp 2 located in maple subdivision
Sold 650k
Depreciated cost of improvements 500k.
Site value per extraction is 150k.

Market derived location adjustment 50k.

I was referring to depreciation being applied to the estimated site value.

 

[Terrel L. Shields]

Land is not a wasting asset therefore cannot suffer depreciation. A change in value is just that. Land is valued as if vacant and available for its highest and best use. Classic appraisal theory.

 

[Joe Flacco]

Can you share the full email content?

 

[NC Appraising]

Land is not a wasting asset therefore cannot suffer depreciation. A change in value is just that. Land is valued as if vacant and available for its highest and best use. Classic appraisal ththeory.

Why does everyone keep bringing that up? Absolutely nothing to do with anything. I never said that and none of what I published said that. Strange.

The extraction method is a classical way to determine site value. Pull several sales, use the extraction method. Compare the extracted site values for a market derived location adjustment.

 

[TerryRohrer]

We are not using the cost approach to place value on the subject property. Just using it to derive adjustments.

How do you use those adjustments, and what impact does that have on your opinion of the value of the subject?