abstraction and the cost approach

[Frederick]

If "Abstraction" or "Extraction" is not a credible method of determining site value with or without land sales then what does that say about the credibility of the Cost Approach?

 

[The Warrior Monk]

Assume for a moment that the Cost Approach is a valid indicator of Market Value (I don't believe so, but that's another story).

If the entire tract is developed, that immediately tells me that the Cost Approach is not necessary in the valuation of the subject. If a substitute cannot be built, then there is no point of using this approach.

The Cost Approach is not required by any lender that I am aware of for the purposes of determining market value. It is used for insurance purposes, issues relating to feasibility, and/or to determine whether excess land exists.

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If you have to determine what a lot might sell for if vacant and ready for sale, I think the best approach to use is to go to competing market areas with similar homes and similar lots and see what vacant lots are selling for in those areas. Often it is not that simple, since lot size, utility, etc. vary. However, it is the best market support available. Once one ventures into areas such as extraction (abstraction), the numbers become "appraiser made" rather than direct market data. "Appraiser made" often gets swept under the rug in many situations, but it can be easily shot down in other, such as litigous settings.

 

[Joyce Potts]

I guess it's time to re-write the text books, David.

Go ahead, you start first.

 

[Fred]

That's what it sounds like to me, too.

Extraction is a perfectly valid technique, which should provide a good indication of underlying land value and should be used when there are no valid comparable sales available within a reasonable distance and time frame... IMHO.

If this is “perfectly” acceptable, then what could possibly be unacceptable? What happens when someone finds a sale or two that is 1/3 or three times extraction value? Is extraction still “perfectly” acceptable?

If reaching opinions or market value without any sales is acceptable, then what it is that Skippy is supposedly doing wrong? I ask this question in earnest because as far as I can tell, pretty much all market value appraisal errors involve developing conclusions that don’t follow the sales – one way or the other.

Regardless of anyone’s prior opinions, any objective person would have to see the irony that on this forum, many think a “comp check” is at least unethical and some have said illegal. However, fabricating the market value of land without any sales is “perfectly acceptable.”

I would be interested to know the “method” by which someone finds the contributory value of the improvements. I think it would be fascinating to test these practices by having appraisers estimate land value by extraction in places where there are land sales sales and without telling them what land sells for. I think those pockets where homes sell above RCN would make for some particularly interesting results.

Why does it seem obvious that if having no rentals in the market area means that the income approach is not applicable, then having no vacant land ought to make the cost approach not applicable times ten.

I guess it's time to re-write the text books, David.

Why? Is there a textbook that varies from David's argument that using sales is better than using no sales.

 

[Joyce Potts]

Dear Mr. Hawkings,

It was a very simple, legit question. Give it a break and spare us your rhetoric. Just tell us the publication date of your next book.

Go regress and get over yourself. We get it that if you can't prove it mathematically, it's worthless.

We just don't necessarily agree.

 

[Terrel L. Shields]

Abstraction is pretty much an outdated term but still seems to pop up occasionally. So I suppose it is part of that great 'body of knowledge' in appraising that makes it everyone crazy because so much of it is obsolete, outdated, indescribable, or controversial..or all.

 

[Scott Lanz]

My question would be at what point would the sales found be less subjective than the appraiser made version?

Let me expand, if I have to travel across state lines to find a similar development, or within the state but in another city over 100 miles away with a different economic base, would the subjectivity be less than than the appraiser made data from sales in the immediate area?

Scott J. Lanz

 

[Fred]

My question would be at what point would the sales found be less subjective than the appraiser made version?

If I can measure the tradeoff from an all-else-equal equal standpoint, and change the word "subjective" to "credible," I'd say a market value estimate with sales is probably always more credible than one without.

FWIW, I wouldn't use the word "subjective" to describe estimating from poor data. Subjective is more like deliberately disregarding data.

 

[Scott Lanz]

Steven,

I do agree that I would rather have some market transactions opposed to the extraction method. I am just thinking at some point that the user is going to look at the sales and go "what the heck are those"?

How about no sales?

FWIW, I wouldn't use the word "estimate" with market value.

 

[Fred]

FWIW, I wouldn't use the word "estimate" with market value

That varies, depending on your scope of work.

I am just thinking at some point that the user is going to look at the sales and go "what the heck are those"?

To some extent, it depends on how it’s done. In general, I agree with your statement, but let’s not lose sight of why this question comes up. Either a lender is making the appraiser do a cost approach (to get insurable value) or there is an assumption that Fannie’s so-called “guideline” is making them do it. No matter how you slice it, it is not something that falls within “necessary to produce a credible appraisal.” To me, the sad part is the newbies who come in, get indoctrinated into filling the form to avoid red flags have a lot of swimmig upstream to do to confront the lack of common sense involved in executing method based on a “substitution” the buyer can’t make because there is no vacant land. The most they are likely to get out of a mentor is just do it or you don't get paid - the same line they are getting from the omnipotent client.

FWIW, I would probably be the least concerned one on the forum if I came across a report where someone admitted making up the land value for the cost approach that wasn’t weighted. (I might even help them find the QA where the ASB said it is OK to do an “unreliable” cost approach if the client makes you do it. And how noble is that). However, the argument that there is “method” involved is one that deserves confrontation.