Cost Approach and those who "mail it in"

[PropertyEconomics]

A formal CA is a waste of time for residential mortgage work.

Well spoken from one, with due respect, that neither respects the cost approach or understand how it truly works. No knock on you ... but you simply are wrong.

If you read the AI texts they will tell you that down markets are times when the cost approach is absolutely essential to the valuation process. Of course they are talking about competently prepared cost approaches not those thrown together to simply meet a clients requirements coupled with a statement that the cost approach means nothing.

SIGH

 

[CANative]

Well spoken from one, with due respect, that neither respects the cost approach or understand how it truly works.

I think I understand the CA as well as any but a few. It's not rocket science. Frankly I'm shocked and hurt that you would say such a thing. I think I've demonstrated that I have a very good working knowledge of the cost approach.

I still say it's a waste of time for simple residential mortgage appraisals. You don't need it to figure out external obsolesence if you're just using a sales approach (remember earlier when I said that external obsolesence is a element used only in the CA and not the IA or SA?). And as far as using the CA to determine HBU... well you don't need that either because the only question you have to answer is "tear it down or leave it alone." And that would be obvious before leaving the property.

It's not a necessary approach for residential mortgage work. This type of property is traded on the market so the SA is really all you need.

 

[PropertyEconomics]

I think I understand the CA as well as any but a few. It's not rocket science. Frankly I'm shocked and hurt that you would say such a thing. I think I've demonstrated that I have a very good working knowledge of the cost approach.

I still say it's a waste of time for simple residential mortgage appraisals. You don't need it to figure out external obsolesence if you're just using a sales approach (remember earlier when I said that external obsolesence is a element used only in the CA and not the IA or SA?). And as far as using the CA to determine HBU... well you don't need that either because the only question you have to answer is "tear it down or leave it alone." And that would be obvious before leaving the property.

It's not a necessary approach for residential mortgage work. This type of property is traded on the market so the SA is really all you need.

CA .. you, and many, believe that an appraisal is only used to make a loan when there are many uses for an appraisal. Like denial of a loan. The cost approach serves purposes that many cant even begin to understand. Its not all about what we think but its about what actually occurs in the lending field ... which is much more than most appraisers know.

My apologies for offending you ... that was not my intention and I assure you I have complete respect for you ... but your comments about the cost approach serving no purpose in difficult economic times goes against the published texts of the AI ... and I do believe they have it right.

Again, my apologies.

 

[Mr Rex]

I was fortunate enough to know the local USDA CG that covered most of NC and picked his brain about USDA's place in the lending world. (He was married to my aunt by marriage sister?, so we were kin) He explained that much of USDA's work was rural volunteer fire departments, rural churches, etc that didn't fit the SCA or IA mold, and that the CA was the only real way to opine a value on such properties. It was enlightening, sadly he succombed to cancer, before I could latch on to his coat tails. I'm sure I am shortchanging the USDA's role, but the examples do illustrate that the CA is not the orphan child it is often made out to be.

 

[J Grant]

I didnt think JGrant would have much to say about the published data ... time for all other questions but not time to comment on what is written that an appraiser MUST do according to the premier publisher and educational institution on appraisal in the industry.

Sigh

Hi, I was busy all day finally got some time..

I like what I read, however I take exception to a publication telling an appraiser what they MUST do. This is a dictionary of RE appraisal, and not USPAP..USPAP does not say an appraiser MUST do this or that, USPAP states that it is up to the appraiser to determine the SOW that leads to credible results.

Just because something is published and they are an educational instiution does not mean one must follow it blindly. I understand the section you posted on the CA and know the basics and what you posted from the book was well written. They state the appraiser MUST include all forms of obsolesence...which actually goes against a specific Fannie guideline someone posted a link to, which stated that in CA for replacement cost an appraiser should NOT include any obsolesence when doing a replacement cost for insurance purposes.

Though I appreciate the material and plan to buy the book, I take issue with the author stating an appraiser MUST do this or that..surely they know that is contrary to USPAP which states the appraiser decides the SOW,which means the appraiser decides what to include and exclude ( the appraiser may be wrong, but the appraiser still has to take responsibility and not rely on a publication telling them what they MUST do).

PS, I did use ext obs in my last two reports today and yesterday , kind of enjoyed it... I understand the value of it thanks to the many fine posts here making a good case for it, and will include it unless I see a reason not to in a particular circumstance. My issue was with the author of this publication use of the word "must", the rest of the content was of high value.

 

[PropertyEconomics]

Like my father always told me .. you can send a kid to school but you cant make them read and you cant stop them from eating the pages.

Sigh ..... but somehow I knew you would know more than the premier authors on the topic of appraisal. Im simply not surprised.

OF COURSE YOU WOULDNT INCLUDE OBSOLESCENCE FOR INSURANCE PURPOSES ... for petes sakes!!

Carry on and good luck.

I simply pray that the appraisal board that governs you never measures you against the texts of the industry as they determine you were misleading in your reports. USPAP states you cannot produce a misleading appraisal report .... the texts state what must be done to not be misleading ... Choose to ignore the writings of the most important publication on residential appraising in the industry if you will ... I do hope that doesnt happen, and you appear to grasp the concept of the need for its inclusion, but you remain defiant against the teachings of the best.

Im not really sure there is more I can do here to assist you. I have given it my best shot.

 

[Terrel L. Shields]

I take exception to a publication telling an appraiser what they MUST do

...well, gee can we make up our own rules?

you can send a kid to school but you cant make them read and you cant stop them from eating the pages.

Musta been related to my daddy. He always told me he bought me books and sent me to school and all I did was gnaw the covers off the back...

There has to be a common "body of knowledge" regarding certain things. Within that body of knowledge there is a lot of flexibility and that is important because we do use judgment in lieu of formula.. Thank goodness. Because if it were all a formula, we'd be out of a job and a computer could calculate it all.

But even if one dismisses most all the literature, intuitively, we have to understand that "value" relates to money and that boils down to the three basics. COST...TRANSACTIONS...INCOME. There would be no transaction if there was no income (future benefit). There would be no limits if there no costs to guage where the "mean" is... And COST is the mean. Sales of 2005 exceeded cost and it has reverted to the mean...maybe even below or soon to be well below if things keep falling. But it isn't going to fall forever. Thus, when it gets too low, the benefit (income) will increase demand and buyers will apply pressure upwards and those transactions will reflect that change in direction and attempt to revert back to the mean and in a bubble will begin the unsustainable "march of the lemmings" towards the cliff.

 

[JSmith43]

They state the appraiser MUST include all forms of obsolesence...which actually goes against a specific Fannie guideline someone posted a link to, which stated that in CA for replacement cost an appraiser should NOT include any obsolesence when doing a replacement cost for insurance purposes.

Fannie is apparently referencing two different scenarios: Scenario one where the appraiser fully develops the Cost Approach and scenario 2 where Replacement Cost (of the structure) is calculated that an insurance company may foolishly rely upon for their replacement coverage.

Fannie didn't say not to include all forms of obsolescence in the Cost Approach.

"can't keep them from eating the pages":icon_lol:

 

[Michigan CG]

I have posted this before, I had one of my main clients ask for an appraisal of a million dollar property and he told me that if I just wanted to do a cost approach that was OK by him considering the location of the property. A properly developed Cost Approach can be, and is an indicator of market value.

A formal CA is a waste of time for residential mortgage work.

If most residential appraisers actually knew how to do a thorough cost approach, and they were required in the 2000-2007 boom years, and someone was actually paying attention and saw the 30%+ EP, informed people with brains would have seen that the trend was not sustainable and the madness would have stopped.

But call me silly.

It may be as useful (applicable) today as it ever has been... to help illustrate external obsolesence.:icon_idea: Conversely in a hot market, it should reveal the excess EI/EP/Marketing costs...:new_smile-l:

Quit making sense, you are confusing the argument.

....If you read the AI texts they will tell you that down markets are times when the cost approach is absolutely essential to the valuation process. Of course they are talking about competently prepared cost approaches not those thrown together to simply meet a clients requirements coupled with a statement that the cost approach means nothing.....

I would argue that the Cost Approach is applicable in good and bad markets. The down market is obvious, but the up market shows excessive profits that cannot be sustained..........2004-2006 is completely applicable.

......It's not a necessary approach for residential mortgage work......

If Cost Approaches were actually done correctly in say, 2005, would someone have identified that EP was way out of whack (how about that for technical terms?).

.....I like what I read, however I take exception to a publication telling an appraiser what they MUST do. This is a dictionary of RE appraisal, and not USPAP.....

You take an exception to a publication........actually you are taking exception to three publications, and those three publications are the most respected publications in the profession.

.....USPAP states that it is up to the appraiser to determine the SOW that leads to credible results
......

If you have a SCA at $100,000 and a CA at $150,000 one of your approaches is NOT CREDIBLE. How can you not see that.

Seriously??????

 

[J Grant]

Mitch , you misunderstood my point ? I am going to follow the guidance of the published book but objected to the word "must" , however I will buy the book you are not wasting your time!