Cost Approach and those who "mail it in"

[PropertyEconomics]

How about this from the Assessor's Handbook:

RELATION BETWEEN COST AND VALUE
The rationale for the use of the cost approach is based upon the economic principle of
substitution. As discussed in Chapter 4, this principle holds that a rational person will pay no
more for a property than the cost of acquiring a satisfactory substitute, assuming no costly delay.
The condition of no costly delay must be satisfied, or the cost of the delay must be added to the
cost of a substitute property. If a property owner would not, or economically should not,
construct a replacement for the existing property if it were destroyed, then a value indicator from
the cost approach has little relationship to market value. This occurs when reconstruction would
not be economically feasible.

The red above is a very good indication of the need for inclusion of external obsolescence in the cost approach. It seems your little assessor book recognizes economic conditions as being a factor in the cost approach ... very well done grasshopper ... it even goes on to say it occurs when reconstruction would not be economically feasible ... also known as financially feasible which is one of the tests of highest and best use.

I believe your posting very well supports the theory for completing an accurate cost approach including all forms of depreciation .....

 

[CANative]

External obsolesence is a matter for the Cost Approach. If you're not doing a cost approach on an SFR because there are direct sales of similar properties then EO is a moot point.

Give it up PE. I'm not a grasshopper any more. Although I do "bug" you.

 

[PropertyEconomics]

External obsolesence is a matter for the Cost Approach. If you're not doing a cost approach on an SFR because there are direct sales of similar properties then EO is a moot point.

Give it up PE. I'm not a grasshopper any more. Although I do "bug" you.

Dont do a cost approach .. no one is holding a gun to your head. But IF you do one you darn well better do it correct ....

For others to say the cost approach is meaningless is pure idiocy ...

Two additional thoughts ... 1) I wonder how many properties in California are assess based wholly on their estimated cost to reproduce or replace?

2) Doesnt it just suck when you post something and someone else reads it and sees the true words that you glossed over in that "gotcha" moment?

 

[CANative]

Dude... How can I know so much about the cost approach if I haven't been doing them all along. Typically I don't do them for older SFRs unless the client cries about it... but so what. It's an unnecessary method for this type of assignment and is inferior to the sales approach. Concentrate on the SA for this type of work. Invest the time it takes to do a good cost approach into punching up the market approach. They just want to know how much the property would probably have sold for.

 

[CANative]

Dont do a cost approach .. no one is holding a gun to your head. But IF you do one you darn well better do it correct ....

For others to say the cost approach is meaningless is pure idiocy ...

Two additional thoughts ... 1) I wonder how many properties in California are assess based wholly on their estimated cost to reproduce or replace?

2) Doesnt it just suck when you post something and someone else reads it and sees the true words that you glossed over in that "gotcha" moment?

You didn't "get me."

California property is assessed based on what it sells for in an arm's length, market transaction. This establishes the base year value. The value can be increased each year by no more than 2%. The assessor will often use the cost approach for properties where market data is difficult such as gas stations and special use property.

 

[PropertyEconomics]

You didn't "get me."

California property is assessed based on what it sells for in an arm's length, market transaction. This establishes the base year value. The value can be increased each year by no more than 2%. The assessor will often use the cost approach for properties where market data is difficult such as gas stations and special use property.

Hmmmm I guess the assessor thinks KenAZ is also incorrect in his meaningless statement for the cost approach then as well huh? And it wasnt me trying to get you .. I think you were trying to catch me in that "gotcha" moment .... but no harm no foul.

 

[CANative]

I can't really make heads or tails out of what Ken posted. Except that I agree if someone is just looking up the cost tables and plugging it in this should not be considered a cost approach. It is just a jumping off point.

You should go to the BOE's website and read the assessor's handbook. It's probably a 1,000 pages or more. You should have some respect for it.

Oh. I see. Yes. I did catch you on that one.

 

[JamesRockford]

Cost Approach

For all you Cost Approach honks, please explain how you PROVE physical depreciation on a 25+ year old house? Remember, I said PROVE, as in substantiate it with FACTS, not some "backed into" guesstimate.

Also please explain how you PROVE site value when the proeprty is in an urban location that has been 100% built up for over 50 years and there have been zero comparable vacant site sales in over 20 years.

Like I said, in MOST cases of a single family appraisal report, the Cost Approach is a meaningless number because some value component has been "backed into" and NOBODY relies upon it to anyway make a purchase decision. Therefore, it is useless and precisely why FNMA does not require it unless it is new construction or never been lived in.

For you guys that THINK you are so smart and want to prove it by spend a few hours doing a "proper" Cost Approach, knock yourself out. I'll go ahead and complete two or three reports and bank about $1,000 that day.

And please don't throw that "you dont know what your doing" either as I have been appraising for 30+ years with EXACTLY one failed appraisal report over that time period and that was caused by erroneous data that I relied upon that EVERY other appraiser also relied upon in my area.

And BTW if your an "Appraisal Forum Addict" you need to get more work AND more life. There is nothing more BORING and LAME than real estate appraisers with too much time on their hands arguing about appraisal standards and practices and opinions.

Remember, those that can do good quality appraisal work do it (and get paid really well), and those that can't either review, teach or talk about appraisal work in forums like this one.

 

[JSmith43]

The Cost Approach value is a MEANINGLESS number unless the property is new construction.

I brought forward your original quote for sake of easy reference since I notice you added some conditions in your second post.

I'll go ahead and complete two or three reports and bank about $1,000 that day.

That Comp Cruncher software must be working out really well for you!:icon_lol:

 

[CANative]

"Prove" is not the benchmark. All we need is "credible."