Hi,
We do a fair amount of REO work, and while most of it doesn't even require that the Cost Approach be completed, well, we're kinda anal, so we do it, anyway. Doing them teaches us a number of things, but it's also recently raised interesting issues that I cannot resolve on my own, thus I am asking for the minds greater than my own to assist in helping us learn.
I'm going to use an example from Illinois - Lake County - and Round Lake, specifically. Here goes...
To what would one attribute a land value of zero, or more accurately, LESS than zero? It goes like this:
Our subject home is 3,988 sq. ft. Good construction, hardwood floors, ceramic tile, all the good stuff. Full basement, 3 car garage, decent lot. 2 years old, still in 'As New' condition.
Try (basically) working that out on any scrap appraisal report you use for messing around with, use almost any rational figures you like (and by that I mean more than $80.00 - $90.00 per SF, etc.) See what happens.
On this particular home the Cost Approach worked out to a rational $424,000. BUT, that was with a stated lot value of $1.00. (Yes, I felt stupid doing that, but we were frustrated, and more or less gave up trying anything more sensible, if it existed.) I considered .01 cent, but thought better of that to spare my client any confusion.
HOWEVER, our Sales Comparison demonstrated, and final value was, $270,000, with a 90 day or less being $250,000.
There's more to the story, about Round Lake, and what it's going through (foreclosures galore, as my fellow Illini know), however, the question remains:
HOW does a professional appraiser account for such a phenomena on that danged Cost Approach? There's no 'Functional Obsolescence,' there's plenty of similar homes, and it's not an over or under improvement for the market. The home is 2 years old, it's MINT. Original purchase price was $414,000 in February of 2006. I mean, what gives?
All I can think of is that BEING in Round Lake (and other communities of Lake County) have become, in and of themselves, 'External Obsolescences' of some kind or another. (This also occurs a lot in Kankakee & Winnebago Counties on 'regular' homes - non-REO jobs, that is - which always confounds me.)
Is iot too much growth too quickly, combined with the now astronomical taxes, etc?? I mean, we had SEVEN REO sales in this subdivision, that IS the market now, so how does one make an account for such a thing...?
Any ideas would be so greatly appreciated. Maybe someone will just tell me what I think I should already admit - that the Cost Approach simply isn't applicable, but that just seems altogether defeatist to me.
Thanks in advance,
Dave...
We do a fair amount of REO work, and while most of it doesn't even require that the Cost Approach be completed, well, we're kinda anal, so we do it, anyway. Doing them teaches us a number of things, but it's also recently raised interesting issues that I cannot resolve on my own, thus I am asking for the minds greater than my own to assist in helping us learn.
I'm going to use an example from Illinois - Lake County - and Round Lake, specifically. Here goes...
To what would one attribute a land value of zero, or more accurately, LESS than zero? It goes like this:
Our subject home is 3,988 sq. ft. Good construction, hardwood floors, ceramic tile, all the good stuff. Full basement, 3 car garage, decent lot. 2 years old, still in 'As New' condition.
Try (basically) working that out on any scrap appraisal report you use for messing around with, use almost any rational figures you like (and by that I mean more than $80.00 - $90.00 per SF, etc.) See what happens.
On this particular home the Cost Approach worked out to a rational $424,000. BUT, that was with a stated lot value of $1.00. (Yes, I felt stupid doing that, but we were frustrated, and more or less gave up trying anything more sensible, if it existed.) I considered .01 cent, but thought better of that to spare my client any confusion.
HOWEVER, our Sales Comparison demonstrated, and final value was, $270,000, with a 90 day or less being $250,000.
There's more to the story, about Round Lake, and what it's going through (foreclosures galore, as my fellow Illini know), however, the question remains:
HOW does a professional appraiser account for such a phenomena on that danged Cost Approach? There's no 'Functional Obsolescence,' there's plenty of similar homes, and it's not an over or under improvement for the market. The home is 2 years old, it's MINT. Original purchase price was $414,000 in February of 2006. I mean, what gives?
All I can think of is that BEING in Round Lake (and other communities of Lake County) have become, in and of themselves, 'External Obsolescences' of some kind or another. (This also occurs a lot in Kankakee & Winnebago Counties on 'regular' homes - non-REO jobs, that is - which always confounds me.)
Is iot too much growth too quickly, combined with the now astronomical taxes, etc?? I mean, we had SEVEN REO sales in this subdivision, that IS the market now, so how does one make an account for such a thing...?
Any ideas would be so greatly appreciated. Maybe someone will just tell me what I think I should already admit - that the Cost Approach simply isn't applicable, but that just seems altogether defeatist to me.
Thanks in advance,
Dave...
