Cost Approach and those who "mail it in"

[J Grant]

The answer definitely leans toward the latter. Some are just not intelligent enough to comprehend the underlying concepts, (sorry, you don't get to use that excuse). Most appraisers lack thorough understanding of certain elements of the cost approach. Some appraisers understand the cost approach but just aren't willing to take the time to do the work. Remember, also, that oftentimes there is no practical way to quantify intangible EO, and that in such circumstances the cost approach cannot be accurately completed.

Why not compelte the cost approach and leave out the EO, and state the CA is used as a value indicator that may not reflect MV?

 

[PropertyEconomics]

Why not compelte the cost approach and leave out the EO, and state the CA is used as a value indicator that may not reflect MV?

Because its not correct appraisal practice that is why!!

Now ... can you cite those published sources that say your method of "nonapplication" of all forms of obsolescence is correct?

 

[David Mescon]

Why not compelte the cost approach and leave out the EO, and state the CA is used as a value indicator that may not reflect MV?

If you don't deduct for all applicable forms of depreciation, you haven't completed the cost approach. An incomplete approach is not an indicator of any kind of value, market or otherwise.

 

[PropertyEconomics]

If you don't deduct for all applicable forms of depreciation, you haven't completed the cost approach. An incomplete approach is not an indicator of any kind of value, market or otherwise.

An incomplete cost approach presented as value would be thusly misleading ....

This post is very well presented David .. Thanks!!

 

[J Grant]

If you don't deduct for all applicable forms of depreciation, you haven't completed the cost approach. An incomplete approach is not an indicator of any kind of value, market or otherwise.

Says who? I have not seen in USPAP or any guidelines that a CA has to deduct for ALL applicable forms of depreciation, and there are no guidelines or USPAP regs that state a CA has to include EO to be "complete".

USPAP says an appraiser should consider all forms of accrued depreciation. That's it. The word is consider, not include, not must include or must deduct.

If an appraiser does not feel that EO is a form of accrued depreciation relevlant to the CA (even though EO may be present in the market), then they can leave it out and explain why.

 

[J Grant]

Because its not correct appraisal practice that is why!!

Correct according to who? You and Michigan GC and David? I like you guys and you know some things about appriasing, but each has also included some things in your posts that are a bit off at times...I know EO is considered standard practice for many in the CA so I can respect you for using it but do not agree that there is a USPAP standard that states always including EO is the only "correct" appraisal practice.

I might use it in future reports but have reservations about it.

Now ... can you cite those published sources that say your method of "nonapplication" of all forms of obsolescence is correct?

There is no published source, just there is no published source that states an appraiser MUST include all forms of obsoslescence to be "correct".

USPAP always states the appraiser decides the SOW and how to fulfill it, and that goes for the CA as well.

 

[Terrel L. Shields]

The CA as a market value indicator must reflect the ACCRUED depreciation, but does not need to separate the Ex Ob from Fun Ob from Phys Dep...And SALES are the way you extract the accrued depreciation. If you thoroughly analyze the sales and break out the improvement value thereof, then you can estimate the RCN and the diff = Accrued depreciation. If you take straight line (or use a cost book chart) depreciation off as a proxy for PHYSICAL depreciation, the balance of that deficiet is Functional and/or External Obsolescence. Obviously, you must be able to measure the value of the site "as if vacant and available for its highest and best use". If anyone needed a reminder....

 

[J Grant]

The CA as a market value indicator must reflect the ACCRUED depreciation, but does not need to separate the Ex Ob from Fun Ob from Phys Dep...And SALES are the way you extract the accrued depreciation. If you thoroughly analyze the sales and break out the value thereof, then you can estimate the RCN and the diff = Accrued depreciation. If you take straight line (or use a cost book chart) depreciation off as a proxy for PHYSICAL depreciation, the balance of that deficiet is Functional and/or External Obsolescence. If anyone needed a reminder....

Terrel, good succinct post on how to extract it...the sticking point would be, is the CA supposed to be a market value indicator, or is the CA a value indicator that may not reflect MV?

The final line on the CA says "value indicator", not "MV indicator", (just like the final line on every apprroach says "value indicator". It is up to teh appraiser to reconcile the diff value indicators, and then decide which, if any , should be relied on as a MV indicator, and the appraiser from their gives the opinion of MV.

Including EO in the CA does make it a MV indicator, my question and maybe there is something wrong with me for asking, but my question is, by including EO we turn the CA value indicator into a MV indicator, and does this give better, or worse information to the user of the appraisal? If it costs more to build then to buy in this down market, is shaping the CA to a MV indicator misleading when it looks like the value of new is about the same as an older resale? And in the prior high market, was it misleading to make the CA indicator a MV indicator bu including high EP when EP is a market force and not a CA factor, with the CA figures already figuring in builder profit?

Why do I even care about such things I have no idea wish I didn't lol. Would certainly be easy to extract the EO and stick it in the depreciation box that is for sure!

 

[PropertyEconomics]

[/b]

There is no published source, just there is no published source that states an appraiser MUST include all forms of obsoslescence to be "correct".

USPAP always states the appraiser decides the SOW and how to fulfill it, and that goes for the CA as well.

Tomorrow I will quote from the leading text on residential appraising that accounting for all forms of depreciation is necessary in proper appraisal. That book is at my office ... but I will quote from it for you ... I gather your appraisal library is small since you say no such published source states an appraiser must include all forms of obsolescence.

I dont know why you argue against that which is absolutely true unless of course you just wish to continue proving you dont understand the cost approach.

David indicated to you that you have not completed the cost approach if you have not reflected all forms of depreciation present in your subject ... that alone should cause you great pause, but instead, you wish to argue that it is "value" and not "market value" .... continue doing it wrong you only harm yourself, your clients, and chance having the state review your work only to point out you simply dont understand the cost approach to value. And for the record you do not ALWAYS include economic obsolescence in depreciation within the cost approach ... its only applied when its present.

That, now, is abundantly clear.


And while I hate to disagree with Terrel ... appraisers who use straight age life methods of depreciation, or straight line, will at some point (and probably many) not accurately reflect the true depreciation occuring in the market. It simply does not occur in a straight line and use of that method of depreciation, although allowable, is most probably not accurate. Is it accurate enough? Perhaps ... but it very well may not reflect the depreciation that is occuring in the market.

JGrant .. question .. do you know how to calculate market derived depreciation from all forms?

 

[incognito]

Why not compelte the cost approach and leave out the EO, and state the CA is used as a value indicator that may not reflect MV?

A "value indicator" that may not reflect "market value"?..??..