2055 int/ext considered a limited appraisal?

[Steve Owen]

Interesting comment, Brad. It leads directly to my point. I think the cost approach is almost always applicable. Therefore, the 2055 is limited almost by default, even before consideration of the certifications.

Bill, I'm a relative new comer. I worked in an econ related field before becoming an appraiser, but have only been doing this since 1993. In that length of time I have never done an appraisal of an SFR where the cost approach was not applicable. I don''t know about NC, but in my market there are plenty of sales of fifty year old homes to make the cost approach applicable. Simply put, the depreciation comes from the market because you know what it would cost to build new and you know what it sold for. Find a few other homes of similar age that have sold in similar condition to your subject and you have the depreciation and the cost approach is applicable. Note that I didn't say it would be the best approach or even that it would be heavily weighted in reconciliation.

I once had an instructor tell a class that the cost approach is not applicable on older homes using a 1004 unless the home is historical because the form says "reproduction" cost and a fifty year old home that is not historical would not be reproduced. BULL S***!! (I only pay attention to what instructors say when they are right.) So what if the form says reproductiion? The guy who wrote the form did not write USPAP and he isn't going to tell me how to do an appriasal either. In the case of the typical fifty year old home, the correct way to do cost approach is replacement cost - you just need to add a comment on the form that that is what you did.

As to your assumption that cost services are not accurate, maybe you should use Marshall & Swift and take one of their courses on how to do it. I've been using it since 1993 and have never seen it fail to be right (after proper adjustment for time and location).

It really bothers me a lot that you said:

I believe it is only applicable to new construction in most SFR cases. This is due to a total lack of understanding on most appraiser's part of depreciation

The fact that there are appraisers out there who don't know how to do an approach does not make that approach not applicable, it makes those appraisers not competent.

 

[John Hassler]

I've really found this topic interesting. Mostly because of the many well thought out views on both sides of the fence. To me this indicates that USPAP is a confusing document (like that's news).

I pulled out my trusty Appraisal Foundation USPAP FAQ's (2001 edition) and this is their position:

"Question:
If an appraiser does not utilize an approach to value at the request of the client, is the assignment a Complete Appraisal or a Limited Appraisal?

Response:
If the approach is applicable to the assignment and an appraiser's peers would utilize that approach in developing the appraisal assignment, then choosing not to perform that approach to value, the appraiser would invoke the DEPARTURE RULE and therefore perform a Limited Appraisal (Issue Date 9/95)"

My interpretation of this is if it's not standard practice in the industry to do the cost approach on a 2055 (and you don't end up with a meaningless or misleading result) it's not departure. Now the question becomes is the cost approach standard practice? I think the cost approach is being phased out for better or worse. I like it because it forces me to keep abreast of land sales of which there are very few in my areas. Lenders tend to use 2055 when there is a low risk of default and in my opinion the cost approach is rarely required to arrive at a credible opinion of value for this purpose.


To Mr. Steve Owen:

Quote:
"Simply put, the depreciation comes from the market because you know what it would cost to build new and you know what it sold for. Find a few other homes of similar age that have sold in similar condition to your subject and you have the depreciation"

What you have just measured here is the market's reaction to physical depreciation, not the actual physical depreciation that should be used in the Cost Approach. For example, if a $10,000 roof with a 30-year life expectancy is 15 years old you would deduct $5,000 in the Cost Approach (for argument sake assume straight line depreciation - I actually use the M&S depreciation table). The market may pay more of less than $5,000 for this depreciated roof but that figure is irrelevant in the Cost Approach There is, however, likely but not necessarily a high degree of correlation between the two. Functional and external obsolescence are a different matter, those are market derived.

John Hassler

 

[Ben Vukicevich SRA]

To the Cost Approach advocates.....did you ever sit down and really think .....hmm...why did FNMA remove it from the form? Why do they let us depart from it when it's necessary.....could it be that we are not recognized cost experts, they know it and are trying to keep us out of trouble???? That's the way I look at it.

When it's all said and done, there are very few appraisers that are expert enough, or detailed enough in their field inspection/notes to complete a cost new on a home. Most use MS and don't even know they are supposed to add permit fees, marketing expenses, architect's fees, etc.

But I could go on forever.....but I don't have to..thanks to the departure provision and scope of work....

Ben

 

[Ben Vukicevich SRA]

Fred,

Not circular. To me, technically, the 2055 order is your engagement letter. This is what the client wants at a bare minimum as per their instructions in the Cert. If you can meet their needs with a credible value by the Sales Comparison Analysis, fine, use the form. If you can't, well, for FNMA purposes-you can't use the form, they won't take the loan and your assignment is dead.

This definitely was an interesting post and I enjoyed it.

Ben

 

[Frederick R. Ruffell]

If you can't, well, for FNMA purposes-you can't use the form, they won't take the loan and your assignment is dead.
Ben

I do not know about this part. I have many times had an order for a 2055 with an interior inspection on new construction and have asked to have the service upgraded to a complete appraisal on a URAR 1004 form. This has been granted without much promble if I can justify it and as far as I know the deal has gone through. Anyway I hope we are all Crystal Clear on the use of the 2055. It will be interesting to hear what is said in the class that the old guy is going to this weekend.

 

[bradellis]

Steve,

You are preaching to the choir here- probably not a bigger proponent for the cost approach in America than me- except perhaps for the folks at Marshall/Swift.

I was not me who said Marshall was wrong. I have found their data to be very accurate- when done right. Better check the string again. I simply said that entreprenurial profit can vary from one builder to another.

And please note that, when I am talking about USPAP, it is from the perspective of an instructor- hopefully without personal editorial comment (I try, anyway). And it is for that reason that I might pose a hypothetical case to illustrate a point. It does not mean that I would personally do an assignment that way or even suggest that others do it that way. What we deal with is what is permitted and what is not- and the ways in which USPAP is being interpreted. The national course is designed to get us all on board at least the basic train that travels in the same direction.

Does not mean you cannot sit in the cliub car or buy a private cabin ticket if you choose to do so.

Brad Ellis, IFA, RAA

 

[George Hatch]

What you have just measured here is the market's reaction to physical depreciation, not the actual physical depreciation that should be used in the Cost Approach.

It is the market's reaction to accrued depreciation that we, as appraisers, are concerned with. So I would say that comparing older homes to newer homes to determine the market's reaction the difference in age is a very valid method and would not conflict with the M&S methodology if both are done correctly. The market's reaction to those factors that detract from the cost new is not just limited to physical depreciation. It also includes the other two types of depreciation. So when an appraiser is measuring the accrued depreciation by comparing older homes with newer homes, they are not just measuring the market's reaction to a 50-year old foundation, frame and roof; they are also measuring the market's reaction to the design and appeal, the types of construction used, the floorplan, the decor and a host of other factors that have nothing to do with physical depreciation. So in some ways, this method could be considered to be a better measure of accrued depreciation than using a table because it is more complete.

Incidentally, when used properly and according to the instructions, the tables used by M&S measure not just physical but also some functional and economic factors. Those tables are not intended to represent physical depreciation factors or measure physical lifespans. The only problem is that most appraisers have never taken the time to learn how to use the books properly. I use the books for almost everything I do and find them to be reasonably accurate, except in those cases where the sales market is on a big upswing or downswing, at which point the quarterly updates seem to lag.


George Hatch

 

[George Hatch]

The 2055 form identifies itself as a Summary Report for a Limited Appraisal process. However, an appraiser can always add a Cost Approach or Income Approach as an addendum if they think either is necessary. If you want to call it a Complete Appraisal and are prepared to add the neccesary explanations and/or any other necessary elements to comply with the minimums you always have that option. Yes, on a technical basis you could probably do a 2-4 property, a 100-unit apartment proeprty, a commercial property or any other use on a 2055 form as long as your were willing to add the neccesary elements so that your reader wouldn't be confused. It's like the infamous "appraisal on a napkin". I guess if they can transcribe the Declaration of Independence and the Bill of Rights on a pinhead, you can fit an appraisal report on a napkin, or a non-owner occupied SFR on a 2055. But it has been my experience that it makes more sense to use the right format for the job. It's a lot easier to write and its a lot easier to read. If an appraisal assignment won't fit well in one format, the appraiser should always consider using a format that will work better, regardless of their fee, and really, regardless of what their client is ordering.

As far as the Income Approach and SFR's, let's look at a scenario and tell me what you think. Let's say the subject property is not currently rented, but it is located in a market area where the typical buyer might be an investor. You know this because at least 35% or more of the buyers for your comparables are off-site landlords and these properties are rented. In addition, a rental survey of the area reveals a very supportable market rent. So you have a market segment where you can reliably demonstrate a market rent and a GRM. Admittedly, such situations will not be common in most areas. However, in such a situation, I would say that an appraiser would be remiss to not do an Income Approach, even if the subject itself were not rented and/or the buyers held themselves out to be owner-users. Even if the client didn't order it that way and even if the appraiser isn't getting paid extra to do it. The reason I say this is that with the availability of such data, the appraiser has no reason not to do the approach. Not only that, but if we say that we are excluding the Income Approach because of a lack of data or lack of applicability even though the data is both available and applicable, how does that affect the reliability of the final value conclusion when compared to an appraisal does include that analysis? Another question is, how ethical is it to say the one thing when it isn't true?

How about the Cost Approach? It seems as if the primary method of determining site value in SFR appraisals is to develop it using "extraction, abstraction, or residual methods". However, what we really mean by the use of those terms is that we are often backing into the site value number by subtracting the depreciated cost in the Cost Approach from the value indicator from the Sales Comparison. Let's think about this a moment. Land value by extraction was meant as a last resort, to be used only in those cases where there are no site sales to develop a site value. So how ethical is it when we use "land value by injection" when we don't have to? I mean, how hard is it to back up your estimated site value by throwing in a few site sales from the area? Wouldn't the inclusion of this data make the Cost Approach more reliable; and conversely, wouldn't the exclusion of the data make the Cost Approach less reliable?

It doesn't seem quite right that the same people who say the Cost Approach is completely unreliable are often the same people who take short cuts that detract from the reliability, and then say the information isn't available when occasionally it is available. Same thing for the Income Approach. So I guess the question I am asking the group here is this: Do we really mean what we say when we opt out of using the complete processes, or are we just trying to take the path of least resistance and only do what our clients are asking for?

I say we should just call it what it is. If it's a limited process and the client has agreed to accept less than the real deal, just invoke departure (properly, not like the way they do it in the 2055 form) and call it a Limited Appraisal. If you're calling it a Complete Appraisal, make sure that you are following the complete process to the extent that the relevant data exists. Reserve "land use by injection' or "no income data" for those occasions when such conditions exist. Say what you mean and mean what you say.


George Hatch

 

[John Hassler]

George's quote:

It is the market's reaction to accrued depreciation that we, as appraisers, are concerned with. So I would say that comparing older homes to newer homes to determine the market's reaction the difference in age is a very valid method and would not conflict with the M&S methodology if both are done correctly.


John's response:

Measuring the market's reaction to condition should be reserved for your adjustments in the Market Approach. Base your phisical depreciation in the cost approach on the actual physical depreciation. Remember, you are measuring cost, which may or may not be value!

John Hassler

 

[Farm Gal]

John:
I think George was indicating that the THREE methods of depreciation, Phsyical, Functional and external, contribute in sum to the difference between existing houseing and new construction, again emphasis on when performed correctly.

George: That was one of the better written summations of the situation I have ever seen and would have helped my excedering headache when taking Appraisal 101 a great deal!

Thank you, sir!!