Cost Approach and those who "mail it in"

[Elliott]

I would suggest Ms. Grant apply for a open position on the ASB. She'd fit right in
and could help develop 2012-2014 USPAP changes where the emphasis would be on
'type' of value. : )

 

[hastalavista]

Why is it an inverted funnel? I thought that's how a funnel should be used. If the small end was up it would be an upside down funnel.

:laugh:

You are right!!! I'll edit my post (thanks!)

 

[Elliott]

Inverted Funnel:

 

[CANative]

Don't change it. It's a good point because what Ms. Grant is doing (metaphorically) is trying to cram all the approaches into the small end of the funnel and then picking up the pieces as they fall out of the large end.

 

[J Grant]

Say you had an assignment to value a public library. You define the value as "Use Value" (or perhaps "public interest value.") The sales and income approaches don't apply. So you rely on the Cost Approach. This is a special purpose/limited market property and based on the identified type of value it would be improper to apply entrepreneurial profit as a cost element.

Okay, fine there are no comp sales or rentals, so you develop a cost approach value for the library. At the end of developing your CA steps, it says, INDICATED VALUE OF COST APPROACH. $800,000. That is your indicated (cost) value for the library.

Next you go to the reconciliation. You state that there were no sales of libararies for 10 years, and no rentals of libraries, therefore you did not develop the sales or income approach. You then state you are relying on the income approach for your opinion of Use Value .

After the reconciliation, the next line reads, "My opinon of Use Value for this library is: $X " (let's say you use $800,000.)

Is the $800,000 the same as your cost value indicator? That is up to you as appraiser to decide. Since in this case there were no other approaches, if you feel the use value is the same as the cost approach indicator value, this is where you state it.

The development and scope of work changes with the type of value identified in Step 1.

I agree with this last one.

 

[CANative]

If you agree with "the last one" then you MUST agree with everything else we've been saying.

 

[J Grant]

They don't indicate the type of value because that has been identified in step 1.
The steps must be completed sequentially in order to conclude credible results.

Look at the steps as a funnel, with the process moving from top to bottom: In Step 1, there are a lot of different possibilities. After completing Step 1, the remaining steps are narrowed down, based on the previous step's results. At the end of the funnel, what drips out is the appraiser's opinion of market value (yes, this is what you've been saying all along); but the market value was defined at the top of the funnel, so everything that proceeds from that point is orientated toward arriving at a market value. The cost, sales, and comparison approaches are all indications of value (what you've been saying); but what you are not considering is that they are all indications of market value since "market value" was defined in Step 1 and drives the rest of the funnel-filtration process (the remaining steps).

Is it semantics at this point?. Though the value indicators might be indications of market value, none of them may be the same as your final OPINION OF MARKET VALUE.

In fact, as know, many appraisers will discard one of the approaches, and say in the reconcilliation, "The income approach is not relied on due to lack of recent rental data, or due to buyers paying above rental return rates due to appeal of beachside dupelexes, therefore the SCA is relied on." When an appraiser does this, and discounts or gives no weight to one of the approaches, did the discarded approach yield market value? If it did, why is it discarded? See that is what I mean...it yielded a value, and yes the appraiser is looking to derive an opinion of MV...so does that make the result of any of the three approaches MV by themselves, or MV when the appraiser says that in their judgement, it is a credible MV?

Now, the CA, IA, and SCA may not be equal to the appraiser's opinion of market value; that is concluded in the reconciliation process. But they are indications of market value. If they are not, then why complete the process to solve a market-value problem? m2:

We are on the same page here, I am just sticking to the fact that on the forms and in published references, the values are referred to as value indicators, not as market value indicators. Why do you think that is?

The reconciliation process determines which approaches (if more than one) are considered most reliable (by the appraiser), and then the appraiser concludes her/his opinion based on all the preceding steps.

I agree, of course!

You may be correct in saying that the cost approach does not a reliable indicator of market value due to X, Y, or Z. But what is incorrect is to say that the cost approach (if developed correctly) is not a an indicator of market value.[/quote]

I am still not sure about this one, sorry don't mean to drive you nutz!:mellow:

 

[J Grant]

I would suggest Ms. Grant apply for a open position on the ASB. She'd fit right in
and could help develop 2012-2014 USPAP changes where the emphasis would be on
'type' of value. : )

OMG!:new_all_coholic:

 

[J Grant]

Don't change it. It's a good point because what Ms. Grant is doing (metaphorically) is trying to cram all the approaches into the small end of the funnel and then picking up the pieces as they fall out of the large end.

I'm just following the steps as they are meant to be followed.:new_all_coholic:

 

[J Grant]

To point out why MV can be different from a value indicator, I have taken this one step further:

Originally Posted by CANative
Say you had an assignment to value a public library. You define the value as "Use Value" (or perhaps "public interest value.") The sales and income approaches don't apply. So you rely on the Cost Approach. This is a special purpose/limited market property and based on the identified type of value it would be improper to apply entrepreneurial profit as a cost element.

Okay, fine there are no comp sales or rentals, so you develop a cost approach value for the library. At the end of developing your CA steps, it says, INDICATED VALUE OF COST APPROACH. $800,000. That is your indicated (cost) value for the library.

Next you go to the reconciliation. You state that there were no sales of libararies for 10 years, and no rentals of libraries, therefore you did not develop the sales or income approach. You state you are relying on the income approach for your opinion of Use Value , as well as readership trends and building use trends (see addendum)

You final opinion of Value in Use for library is: $700,000.)

But your cost value indicator was $800, 000. Why are they different? In the reconciliation, you said, "See addendum". And in the addendum, you state, that even though there were no sales or library rentals, and the cost approach indicated a value of $880,000, market research shows consumers are starting to use EBook readers and that libraries are cutting back hours and some towns are converting them to other uses, or even closing them. Therefore, your value of Use opinion of value is $700,000 (different from your CA indicator).