Cost Appraoch Insanity!

[Willie]

Willie,

My friend, if this home is out of place that's a bummer, as half of this town has been developed since, oh, about 2000 or so. Is that about right, Mike Neff...?

Lake County is in a shambles due to nonsense like this combined with the now galactically oppressive tax rates to pay for all the new 'stuff' they need.

I call this the, "If they come we will tax them and then figure out if we can afford all the expansion accommodations needed."

Dave...

If those 2,000 homes are the same size and have suffered the same loss, they likely all were out of place. Why pay the original prices to live in that neighborhood when you can pay a similar price for maybe not quite as good but close and live in a better neighborhood.. Obviously, I don't know the market and or area there.

 

[xmtpedprl]

Willie,

Man, I assure you, hundreds of homeowners lost a hundred or more thousand dollar's of 'value' over the past year in Round Lake. Nothing unique these days nationwide, but for us it's now becoming a reality normally unheard of.

God help those (remaining) who have the ARMs expiring, they will be unable to refi unless their loan was quite small in comparison to their sale prices.

Dave...

 

[Fred]

One should meditate on this appraisal version of a Zen question.

Or is that a Zen version of an appraisal question.

 

[TJSum]

One should meditate on this appraisal version of a Zen question.

Appraising becomes much easier once one is enlightened by the answer.

Grasshopper has meditated and has come to this conclusion...

By using the proper adjustment, external obsolescence (based on negative builder profits), one is explaining why the two approaches to value are not equal. It shows the reader of the report WHY.

If an appriser just wanted to "equalize" the two values, they would play with the Site or SF numbers until they make it work somehow, that would be trying to make them equal instead of showing the proper reason why they are not.

 

[JT1974]

Dave,

The answer to your question lies within pages 411-414 of The Appraisal of Real Estate Twelfth Edition.

Basically, you are dealing with external obsolescence (likely temporary) due to a current oversupply in the market.

External obsolescence will be reflected in the land as well as the improvements. However, your methodology of slashing your land value to $1 is incorrect. Land values will generally fall in an oversupplied market. However land values do not drop to $1 BEFORE external obsolescence is attributed to the improvements. I'm sure if you do some more digging, you will find land sales out there to support a more realistic land value. The incremental difference between the value of your property via the cost approach (using a market based land value vs. a rectal based land value) and the sales approach will be attributed to depreciation including external obsolescence.

For the record, I hope this thread does not end up turning into this month's edition of "The Cost Approach is Irrelevant". Even though my good friend Steven Santora doesn't like the Cost Approach, I say it is still a worthwhile endeavour. Perhaps not so much in New York City........but definately here in the Midwest where land sales are plentiful.

 

[Craig in Oregon]

I threw the I Ching

and it (the oracle) said

two approaches

each independent

vary from each other

by a mystical number

can be. in this case,

reconciled/explained by what has

happened in the larger market

that is not due to any on site changes

or in cost changes (internalities)

The reconciliation uses the difference in figures as the

adjustment that "explains" the difference but to my way of thinking it

is not the same as equalizing the approaches. I mean the Ex Obs is

what the SCA is telling you based on market decline, not a number generated in the
CA itself.


For this example you have to work the SCA first which is a good idea anyway

in order to see if there is a real gap between SCA and CA in a 2 year old home.

Two years ago the gap would not have been there and we all know what has

happened worldwide in last 24 months including the UW/reviewer of your report.

TJsum-san is also right, the diff is in the pocket of the builder now, but if the builder still owned this house, they would have the same problem as your 2 year owner.

 

[xmtpedprl]

Thanks, Jason.

I'm going to use Craig's method of simply spelling it out, as I believe he's exactly right.

HOWEVER, that still won't solve what LAND values are worth, that I honestly do not know, but I acknowledge that an EO must be applied.

I do have the 12th Edition, I'll look into it, and appreciate the heads up.

Thanks dude,

Dave...
​

 

[hastalavista]

By using the proper adjustment, external obsolescence (based on negative builder profits), one is explaining why the two approaches to value are not equal. It shows the reader of the report WHY.

TJ-

Good post.
I would comment that an explanation is in order to explain why the two approaches to value are not equal.
I would also comment, however, if one applies an adjustment to make them equal, then one isn't explaining the difference, one is equalizing them.

In deference to Jason, I will not degrade this into an anti-cost approach diatribe! :new_smile-l:

 

[hastalavista]

I say it is still a worthwhile endeavour. Perhaps not so much in New York City........but definately here in the Midwest where land sales are plentiful.

And I agree that when the market dynamics are such that buyers actually consider building their own homes vs. purchasing them ready-built, consideration of the cost approach is appropriate. :new_smile-l:

 

[Willie]

Willie,

God help those (remaining) who have the ARMs expiring, they will be unable to refi unless their loan was quite small in comparison to their sale prices.

Dave...

Aahhh it ain't no biggie, so I wouldn't get all broken up or religious about it. If they are on an ARM, they probably didn't have much in it to begin with, and they have a the greatest, not the most willing, buyer you could ever come up with, the lender. Hopefully they were in cahoots with the original developer to begin with, playing his pump up the value via their approved appraiser game.