Cost Approach and those who "mail it in"

[J Grant]

The CA starts out as an indicator of cost to build plus land minus physical decpreciation. The fact that appraisers add in market derived subjective extracted amounts of EI/EP or econmic ext obs, changes it from an indicator of just cost to build plus land minus physical depreciation, to a value that has been impacted by market conditions, thus making it an indicator of market value.

But whether or not the CA market influenced value, matches, or has to be close to the other value indicators...therein lies the controversy. If an appraiser backs into, or backs out of the CA using the the very same SCA value they develop, and then subtracting cost to find the difference and then applies it back into the CA as economic obs, yes, each and every time the CA value will line up with thier very own SCA value.

On the flip side, they derive an SCA, and then subtracts out cost to find enough EP/EI , and then add that exact amount back in.

The approaches, even though derived from market data, are supposed to be developed independently . Then the approaches are reconciled to the appraisers opinion of MV.

(I'd like for them to find it in the reference books, a link that recomends backing into our out of the CA with your own value conclusion from the SCA).

Adding in a reasonable amount of EI/EP is different from adding in the exact amount you got from your very own SCA value, which means in essence backing out of the sales approach to make the value indicator a match for the SCA value indicator. The danger in this is that if your SCA value indicator is wrong, you are now reinforcing support for a flawed value, instead of allowing the value indicators to represent different market points of value, and thus be reconciled to a MV opinion, as well as letting users of appraisal to see what the 3 diff approach value indicators were before the reconciliation.

I am sure a couple of insults will follow this post, go ahead playground bullies, come up with a stupid insult.

 

[CANative]

D'oh!!!!!#$$%@

 

[CANative]

If the purpose of the appraisal was to develop and report an opinion of:

Use Value then the results of the CA would be use value;

If the purpose of the appraisal was to develop and report an opinion of:

Business Value then the result of the CA would be business value;

If the purpose of the appraisal was to develop and report an opinion of:

Public Interest Value then the result of the CA would be public interest value;

If the purpose of the appraisal was to develop and report an opinion of:

Assessed Value then the result of the CA would be assessed value;

If the purpose of the appraisal was to develop and report an opinion of:

Insurable Value then the result of the CA would be insurable value;

If the purpose of the appraisal was to develop and report an opinion of:

Market Value then the result of the CA would be market value;

and so on and so forth.

 

[Elliott]

Ms. Grant said, The approaches, even though derived from market data, are supposed to be developed independently .

What? So your suppose to 'white room' the process? The Income Approach overlaps the MA and the CA overlaps the MA. The MA can stand alone, but I don't understand the concept that they are to be 'developed' independently. Why would they require 'independence.' Are there distinct groups of potential purchasers who buy based on the CA? At the end of the day, there is one group of market participants for a property and they combine influences, so why should an appraiser separate them?

 

[hastalavista]

D'oh!!!!!#$$%@

:laugh:

Trust me, I know how you feel! :new_smile-l:

 

[J Grant]

If the purpose of the appraisal was to develop and report an opinion of:

Use Value then the results of the CA would be use value;

If the purpose of the appraisal was to develop and report an opinion of:

Business Value then the result of the CA would be business value;

If the purpose of the appraisal was to develop and report an opinion of:

Public Interest Value then the result of the CA would be public interest value;

If the purpose of the appraisal was to develop and report an opinion of:

Assessed Value then the result of the CA would be assessed value;

If the purpose of the appraisal was to develop and report an opinion of:

Insurable Value then the result of the CA would be insurable value;

If the purpose of the appraisal was to develop and report an opinion of:

Market Value then the result of the CA would be market value;

and so on and so forth.

I understand the above. However, when you say the (using the last one as an example, since it is the most common res assignment), when you say, the "result of the CA would be market value", you should be saying, the "result of the CA is an INDICATOR of market value", it is not yet YOUR OPINION of market value, which is only supposed to come after the reconciliation.

The issue is that some appraisers are tailoring the CA indicator to the same value as the MV OPINION of value, and the opinion of value is only supposed to come after the reconciliation...therefore they are backing up a second time into their first run at the CA value indicator, or as you perfer to call it , the CA market value indicator, and tweaking the data to match their opinion of MV.

Look on your software and pull up a 1004 form. After CA, and income, and SCa approaches, each lines says, "Value Indicator". It does not say, "market value indicator". And note that this language is used on a form where the purpose is stated as deriving an opinion of MV.

The form does not use the word market value till AFTER the reconciliation, so technically my use of the language is correct.

And it is not a case of the "Form made me do it", appraisal methodology in reference guides talks about the value indicators, and the three approaches to VALUE, not the three appraoches to market value, the three approaches to insurance value, the three approaches to taxable value, etc. They are always called the three approaches to value, and AFTER the reconciliation, the appraiser decides , in a MV purpose report, which of the three value indicators to weight (or weight most) toward market value, in an insurable value report, in the reconciliatoin, the appraiser decides which of the three approaches (or all), to weight toward the opinon of insurable value, and so on.

 

[J Grant]

Ms. Grant said, The approaches, even though derived from market data, are supposed to be developed independently .

This is the way the three approaches to value are described in a number of appraisal references, will try to pull some up later or tommorow...they describe appraisal methodology as developing the three approaches independently, then reconciling the results.

What? So your suppose to 'white room' the process? The Income Approach overlaps the MA and the CA overlaps the MA. The MA can stand alone, but I don't understand the concept that they are to be 'developed' independently.

They approaches in a sense overlap due to being based on same subdivision market data. But even though they rely on the same data pool (market activity in subject area), the approaches are developed independently, one at a time, in whichever order the appraiser cares to develop each approach.

Why would they require 'independence.' Are there distinct groups of potential purchasers who buy based on the CA? At the end of the day, there is one group of market participants for a property and they combine influences, so why should an appraiser separate them?

The appraiser doesn't separate them, the methodology separates them. IF an appraiser is using market data information from competing sales and listings, then the two approaches, income and sales, would include the same potential purchasers or sellers or renters, so in that sense they are interelated, still, they are developed separately, in the sense that the appraiser develops the SCA, for example, then develops the IA. The appraiser should not devleop the SCA, then develop the IA, then realize they are different values, then go back into one of the approaches to tweak it to line up with the other approach. That is no longer developing them independently.

The data on CA also comes from the market, local builder profit, typical EI etc, but it still should be developed indpedently, not changed around to match the SCA or income approach BEFORE THE RECONCILIATION.

The reconciliation is there to address differences between the values from the three approaches, or explain why you are weighting one more, or discarding one as unrelaible etc. Appraisers who tinker with each approach to make the values line up the opinon of value they decide is "right", thus changing the values on the three approaches to match or come close to each other BEFORE the reconciliation, are no longer depeveloping the 3 approaches independently.

 

[CANative]

Each approach results in indications of value. Depending on the purpose of the appraisal the types of value will vary. These indications are opinions. These opinions are reconciled.

If you start off with one type of value you will finish with the same type of value.

 

[J Grant]

Each approach results in indications of value. Depending on the purpose of the appraisal the types of value will vary. These indications are opinions.

Are you sure about this? RE, Oopen a 1004 form on your software. Read the final value line language after each approach. The final line of derived value on each approach is called a value indicator, not an opinion of value indicator.

The report asks for the appraiser's OPINION of value only after the reconciliation. The langauge on the form mirros the steps of report development. The appraiser develops the three approaches to value, and comes out with three value indicators. The appraiser reconciles them, and THEN forms an opinion of MV, (or insurable value, etc). During the reconciliation, the appraiser then forms an opinion of MV based on one, two , or three of the value inidcators, which based on appraisers'r judgement, best supports a credible and supported opinion of MV.

Whether to call the value derived from each of the three approaches, value indicators or opinion of value indicators is not just a play on words, it goes to the heart of appraisal methodology. If an appraiser follows proper methdology, they allow the value indiators to be developed from market data, research analysis, without the influence of their opinion. Then, after all three approaches are weighted in the reconciliaiton, the appraiser relies on one, two, or all three to support their opinion of MV (or other type of value)

But, if an appraiser forms an opinion of each value indicator, before they get to the reconciliation, the appraisal loses objectivity and the data becomes influenced by one of the value indicator s at the expense of the others.

For example, the appraiser develops the SCA value indicator. It is 120k. The appraiser then develops the CA indicator, using a reasonable market extracted amount of typical EP/EI. The IA value indicator is 100k. In the appraiser's "opinion", the IA is too "low", so the appraiser plays with the cost to build, or land value, or adds in extra EI, till teh CA value matches the SCA value. This is forming an opinion of indicated value, instead of allowing the indicated value to develop from research , verification etc of the market data.

Compare the two developments: The appraiser who develops the two approaches, CA and SCA without basing them on opinion. The CA is 100k, and the SCA is 120 k. In the reconciliation, the appraiser may decide to base the MV on the SCA at 120k, and give little or no weight to the CA. Or, if they think the sales prices are starting to separate from value, they might weight the CA more, and give an opinion of MV at 110k. In either case, at least the users of the appraisal can see the differences between the value indicators, and perhaps ask questions, or make certain decisions.

Contrast this to the appraiser who develops the two value indicators as opinions of value, before the reconcilation. Their opinion is that the 100k CA looks too far away from the SCA value indicator, that it looks too low, so they add land value and EI and bring the CA value to 119 k, neatly supporting the SCA value of 120k. There is no reconciliation , because the opinion is formed before the reconciliaiton, 120k. The user of the appraisal has no clue to any gap in value indicator, and is supplied with a possibly misleading CA value indictor of 119k, arrived at by possibly inflated EI amount, or above market land value amount.

 

[CANative]

I could have answered these questions without ever having seen a 1004 fannie report. They are fundamental.

I'm going to wear you down by responding to your multi-paragraph arguments with one liners.