Cost Appraoch Insanity!

[xmtpedprl]

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...

 

[TJSum]

The problem is UW's expect and demand to have the Cost and Market Values fairly similar. That is what causes the problem.

Cost does not equal value. In a stable market with solid values, they should be similar. During the boom years, the Market Value always was way above what the Cost Approach was showing, actually if the UW's would have been paying attention to that instead of insisting the numbers "match", it could have pointed to a market bubble with a needed correction. Now with the down market we are seeing the opposite, the Cost Values are higher than the Market Values, this is why many builders are in trouble and/or going out of business. It is also predicting better times are ahead for the real estate market because values may have corrected too much.

IMO the area where the two approaches to value can be "equalized" is with EP. In good times that profit margins are grossly exaggerated, in bad times it is actually a negative number where each house built will show a loss. EP is where the adjustment is made IMO.

 

[xmtpedprl]

Craig,

That's what I was leaning towards, the 'External' answer, but to be honest I lacked the courage to try it, as it seems so esoteric for the average client.

Thank you for putting into words what I was hoping was the case, maybe I'll try it and hope not to get trashed by some reviewer. That is some advanced stuff, even if it's mathematically remedial.

Dave...

 

[hastalavista]

Craig,

That's what I was leaning towards, the 'External' answer, but to be honest I lacked the courage to try it, as it seems so esoteric for the average client..

I wouldn't call it esoteric. We can identify the adjustment and know what the adjustment is dependent on: It is dependent on the cost approach being similar to the sales comparison approach. And, when the two cannot be reconciled, then Economic Obsolescence is the equalizer.
Note, however, that this process equalizes the CA to the SCA. That implies to me that that CA is assumed to be non-credible unless it corresponds to the SCA. So much for an independent approach to value! :new_smile-l:

 

[xmtpedprl]

I think you know what I mean, Denis. The world (of clients and their reviewers) just may not be ready for such a sensible solution!

;^)

Dave...

 

[Fred]

Any ideas would be so greatly appreciated.

Stop doing the cost approach?

It is dependent on the cost approach being similar to the sales comparison approach. And, when the two cannot be reconciled, then Economic Obsolescence is the equalizer. ]Note, however, that this process equalizes the CA to the SCA. That implies to me that that CA is assumed to be non-credible unless it corresponds to the SCA. So much for an independent approach to value!

If you equalize them, would it be more accurate to say that the CA was not "independent," or that there was really only one approach?

 

[The Warrior Monk]

If you equalize them, would it be more accurate to say that the CA was not "independent," or that there was really only one approach?

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

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

 

[xmtpedprl]

Steve,

FWIW, I *hate* the CA, however, in saying that I don't mind balancing that with the fact that I admit to learning from it. Some of our clients don't ask for it, but I insist that all my guys (and gals) do it anyway. Anal, I know.

As for equalizing? Well, you have to make an account for the SCA, no...?

Dave...

 

[hastalavista]

If you equalize them, would it be more accurate to say that the CA was not "independent," or that there was really only one approach?

That implies to me that that CA is assumed to be non-credible unless it corresponds to the SCA. So much for an independent approach to value! :new_smile-l:

I thought I implied that?
But I have no problem explicitly saying I agree with you! :icon_wink:

 

[Fred]

Steve,

FWIW, I *hate* the CA, however, in saying that I don't mind balancing that with the fact that I admit to learning from it.

Are you sure that's not unlearning?

I thought I implied that?

That's why I asked - to see if I could actually hear the sound of the hammer on the head of the nail, instead of just the sound of hammer passing through the air. I think there just might be appraisal reports that say - ooh look, everything comes out the same, they confirm each other.