Appraised value different from sales comparison value.

[Fred]

Steven,

I'm kind of a hillbilly

They got hills in Fla?

 

[Abester]

Fire ant hills...

 

[Fred]

Rex and Greg,
One of these days when the same thing happens another thousand times you might begin to believe me. The real problem with the cost approach to market value is not that it is based on unsound, medieval economic theory. The real problem is that the habit of uttering unsupported conclusions becomes unbreakable. You have seen the combination of umbrage and shock that ensues when someone who has spent 10 or 20 years making up land values in areas where there is no vacant land and no land market, when someone actually challenges them to support their pronouncements. Don’t you notice that every strong advocate of the cost approach uses the same ipse-dixit presentation? Yup, the cost approaches does the dishes, washes the laundry, and cleans the toilet. Just look at the tone of this guy’s posts.

and why the cost approach is an important benchmark indicator.

If you could stop ranting long enough to give an technical answer to technical question -
In a market value appraisal, specifically what does one find out doing the cost “approach” that one wouldn’t know just from the cost "estimate?"

 

[CANative]

I'm no longer convinced that lenders want to see the cost approach merely for insurance. I think they feel semi-naked without it. Kind of insecure.

 

[Dutchman]

Final value was input by the secretary when she started the file because it was on the order or on the sales contract.
Laugh if you want to but I've seen it happen.

 

[Lost Cause]

You can tweak the land value, to match the market approach. The point of a cost approach is to develop a credible opinion of value, and break down that value rationally. To adjust the value to become more aligned with the market approach is not unethical, or an unprofessional move.

We've kind of gotten past this in the thread, but I would like to clarify: What you describe here is precisely, and exactly, "backing into value".

It's just one of the many crazy things appraisers do to try to make the Cost Approach to Value result in a reliable indicator of market value. Jeremy, there are many experienced appraisers who are dubious about any relationship between cost and market value.

As to the original post, a conclusion like that without comment sure does look like it's a typo.

 

[Mike Kennedy]

Mike. The three approaches to value oftentimes do not match up on a final appraisal. Many lenders & institutions insist that they should, but they are incorrect. The cost approach should ring in higher than the market approach, in a declining / distressed market. The cost approach should come in lower in a rising / bubble market. Land value should fluctuate up and down, to somewhat align these numbers, but they are only the same in a truly stable market.
The cost approach is an important benchmark value to indicate runaway or depressed markets. Marshall & Swift uses benchmark estimates to determine average building costs. If your subject home is outside of these ranges, that tells you the market is fluctuating, & land value is on the move, along with actual home valuation (not necessarily building costs). In many distressed markets, an income approach may yeild the highest value, as absorbtion rates increase for rentals, & decrease for private homes.
The cost approach should never be undeveloped, because it is a very important check to value, with every appraisal. An appraisal with no cost approach is always a sign of appraiser overconfidence, or incompetence. If you come up with two different figures, you must decide on one, & talk about that reasoning in your reconcilliation. The market approach is most relevent, & the cost approach may indicate to you weather a liberal or conservative approach to valuation is warranted. To adjust the land value to more closely align these numbers should yeild the most consistent results, & keep your provider happy.

Jeremy Hall
Jeremy Hall Appraisals
Thornton, CO

m2: :icon_idea:

Now that you got alllllllll that off your chest Jeremy, suggest re-reading the OP, specifically........

an appraised market value of $470,000, a sales comparison value of $500,000 and a cost approach of $499,000.


..........then my first post.

 

[Fred]

We've kind of gotten past this in the thread, but I would like to clarify: What you describe here is precisely, and exactly, "backing into value".

It's just one of the many crazy things appraisers do to try to make the Cost Approach to Value result in a reliable indicator of market value. Jeremy, there are many experienced appraisers who are dubious about any relationship between cost and market value.

JH,
On that point you want to clarify, that is part of what I was referring to in my "habits" comment. When I started doing this, I made the "backing in" observation to another appraiser. He said, what's your problem, I did it the same way the book says to do it. He showed me the 9th edition, which was the latest at the time. It includes subtracing either capitalized value or sales comparison value from replacement cost as an "indirect method" of finding accrued depreciation. How's that for backing in? My point is that if you spend enough years appraising by "balancing the books," how are you ever going to understand someone else's objections to your systematic use of circular reasoning.

 

[Mike Kennedy]

I am not sure if this is an issue or not as I have never seen it. Doing a field review and the appraisal I am reviewing, which is an SFR/1004, has an appraised market value of $470,000, a sales comparison value of $500,000 and a cost approach of $499,000. $470,000 looks about right and $500,000 seems a little high. I have never seen the market value and the sales comparison value differ on a 1004, but than again Im not sure if it is an issue. The property is a typical SFR with plenty of comps to chose from.

Good Point Dutch. I forgot to ask, was the report in OP a Sale appraisal? what license level did the appraiser hold? was the appraiser LOCAL? :new_smile-l:

 

[Kevin Mc]

Big assumptions.

But I maintain the appeal that to omit the cost approach is like calling yourself a Sally. Man up and do it every time.

Even if it offers little to no credibility?

So there are some cases where the cost approach is not credible, in comparison to the market approach.

Thank you.

But in most streamlined developments, it is a very effective check to value.

They are few and far between in my area, Levittown (1946-1952) being the most recent

The market approach should always be your final value, but the cost approach is a breakdown of expected value, based on national building trends, & extrapolated land value.

I put little thought into the cost approach because in my market things are fairly cut and dry. I don't base it on national building trends and I certainly don't rely on M&S as their numbers are skewered beyond belief. Your market may differ.