Cost Approach and those who "mail it in"

[David Mescon]

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.

And this has what to do with the price of tea in China?

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?

"Discarding" or not utilizing a particular approach is very different from giving that approach more or less consideration in the formulation of an opinion of value for a given subject property. If an approach was utilized, then it yielded an indication of value. If it was not utilized, it did not yield an indication of value. Just because one particular utilized approach may be more credible than another and therefore, given greater consideration, it does not in any way negate the fact that any other approach(es) utilized did not yield indications of the same type of value, albeit, with less credibility and/or reliability. Regardless of the degree of correlation from a numeric or percentage perspective, each approach will yield an indication of the same type of value.

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?

Maybe, just maybe, it's because all of the forms you refer to specify that they are intended to yield opinions of MARKET VALUE, and not some other type of value. Therefore, any and all indications of value within the constraints of those forms are in fact indications of market value and not of any other type of value. In other words, the formulation of an opinion of a given subject property's MARKET VALUE is implicit within the confines of these forms.

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:

This goes back to what I stated above. Each approach in one of these form appraisals yields an indication of the property's market value. The degree of credibility/reliability may vary substantially between the approaches utilized, but that doesn't change the TYPE OF VALUE a given approach yields an indication of.

..........

 

[beetle27]

Have you ever used any other data company than M&S

 

[beetle27]

Many of the appraisal reports I have reviewed over the last few years have included the cost approach. In most cases the indicated value by cost approach ends up being within $5K or less of the indicated value provided through the Sales Comparison Approach. I have yet to see one of these reports where external (economic) depreciation was taken into account. In nearly every case where Marshall & Swift is cited as the source of cost data, it appears that local and regional multipliers were not used (or at best they were rounded).

IMO, if the cost approach is completed, and external (economic) depreciation is not taken into account, the number provided by the Cost Approach would be (in most cases) notably higher than the SCA.

Just about every builder (in my area) I have interviewed over this period of time has told me that they are essentially building in order to keep their crews working with breaking even as a goal, some even indicate that they operate at a slight loss. I have spoken to very few who are making a profit, and of those few, most indicate that the margins are slim. I spoke with someone at Marshall & Swift earlier this year, who informed me that the figures provided in their cost data take into account entrepeneurial profit.

Soooo...if the proivder of the cost data states that the figures include entrepeneurial profit, and most of the builders (not all) with whom I have spoken state that such profit does not exsist at this time, what is the relevance (or more importantly, the reliability) of the Cost Approach, when it matches (or nearly matches) the SCA, when economic depreciation is not included in the development of CA?

I am aware that many of the more experienced appraisers in my market (an presumably nationally) have been driven out of the business due to the changes caused by the HVCC. I am also aware that many of the people who came into the profession in the late 90s/early 2000s were not taught the proper way to develop the CA, many have told me that they were taught by their mentors during this period to "back in" to the number and to make sure that the figure was close to the SCA.

Are those of you who see the work of other Appraisers seeing what I am seeing? Seems that many are "mailing it in" when it comes to the CA.

Any (or at least most) thoughts are appreciated.

Have you ever used any other data company than M&S?

 

[JSmith43]

I spoke with someone at Marshall & Swift earlier this year, who informed me that the figures provided in their cost data take into account entrepeneurial profit.

Could we get a ruling on this? My guess is that he spoke to someone at M & S that thought contractor overhead was EI.

I swear they disclosed it in writing that EI is not in their cost figures.

 

[PropertyEconomics]

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).

JGrant .. stick with Residential .... pulling an adjustment out of a dark place is not proper ..... and it is apparent you dont fully understand value in use .... so stick with what you almost know not what you totally dont understand.

 

[Mile High Trout]

I think there was already a ruling on that one mentor, posted way the heck back in this thread if I recall.

Who could keep up with these threads when they run this long?

Someone needs to mail in a new topic.

I've taken care of that for you guys. 1-800-call-nobody.

 

[Michigan CG]

Value in Use is not even remotely related to Market Value.

 

[Mile High Trout]

Value in Use is not even remotely related to Market Value.

If that's what this thread degenerated to, I'm glad I did not keep up with it.

The original question of the thread has been answered. Move along. Nothing to see here.

 

[PropertyEconomics]

If that's what this thread degenerated to, I'm glad I did not keep up with it.

The original question of the thread has been answered. Move along. Nothing to see here.

Then why do you keep posting? Click Log Out .... you are always free to do so.

 

[Mile High Trout]

Then why do you keep posting? Click Log Out .... you are always free to do so.

You log out first. I double dog dare you.

Now for your visual enjoyment: Old man winter chimp