Cost Approach and those who "mail it in"

[JSmith43]

Appraising Residential Properties, Fourth Edition, page 82:

Mich: I think you should pull out all stops. Any thing in your Dr Seuss collection? I fear he may have passed on before covering the CA in memorable detail.

The Cost Approach in a Hat
The Cost Approach is not beyond reproach

But, in trouble, you might, if you don't do it right.

If some parts are left out, the instructor might shout,

But the AMC will giggle with glee

As another will pay and they'll go scott free,

When lenders come collecting per warranty

Next years E & O will be triple the fee!

 

[Doug DeMars]

I'm still working on getting that darn SCA to work right.

 

[J Grant]

All right, a bunch of you should be celebrating...I deducted economic ext obs from the report I am handing in today...not too painful...I will have to change my wording, re on prior cost approach (replacement cost) I stated the value indicator was replacement cost and may not represent market value.

Now I will make a statement that cost approach was derived with applying ext obs and given little weight toward MV due to variance over time in applying depreciation.

I read the Fannie guide (I think it was PE who posted it), could not find the accrued dep section, did find a statement regarding replacement cost for ins puroposes on a report that Fannie does not want any obs or depreciation applied when purpose of CA is replacement for insurance purposes...

RE, for the people who routinely apply ext ec obs on res reports, are you using replacement cost or reproduction cost?

Regarding the story about a cert general who lost license not putting ext obs on a CA, I did not follow the story back when it was posted, had to be due to more than that, or maybe the building or house was a value he based on the CA? There had to have been other issues with the report or more to the story I would assume, anyway, thanks for all input on the subject.

 

[CANative]

*Sigh*

1. IMO, there is no such thing as "negative EP/EI." If there is no incentive for the developers contribution to the project then nothing gets developed.

2. For an existing improved property there had to be EP/EI when it was built or else it would not have gotten built.

3. If you are "forced" to complete a cost approach on an existing property in a market that is bad you still have to include a "reasonable*" amount of EP for the CA model to work. You just have to depreciate it out due to the EO.

*"Reasonable" can be based on your opinion and derived from historical EP/EI or any logical argument as to what it would take to incentivize a developer to take on the project.

 

[OSU Beavers]

How am I suppose to cost up this one?

Cost tables not found.

 

[Mr Rex]

Cost tables not found.

Baled straw houses are covered in M&S "Special Studies". The charts for Baled Straw are on pages Spec 35-39.

 

[Lost Cause]

Is This Mere Semantics Or Do I Have A Point?

IMO, there is no such thing as "negative EP/EI." If there is no incentive for the developers contribution to the project then nothing gets developed.

I would agree that there is no such thing as negative EI, for the very reason you cite. However, EP is another thing altogether. That could well turn out to be negative, but one would never know for certain before any development is done. Clearly market conditions could potentially vaporize the anticipated EI, and then some.

 

[Mile High Trout]

You guys know your topic matter very well here, surely more than me.

But how can these considerations be accurate, even if applied correctly, in markets rampant with flips and flops?

The notion of depreciation and obsolescence related to valuation and price, is an approach based on the presumption of reliable benchmarks for primary valuation.

The cost approach is something requested for market value appraisals, which should not be requested at all. If the lenders want insurable value appraisals, they should not look for that on market value appraisal requests.

Requests to "match" from relaying parties is a prevalent approach, perhaps even more so than the proper methods detailed by appraisers here. You've got to roll with the program to some degree. I'm not going to spend all day doing ca's when I can spend 1/2 hour on them. Especially considering I'm noting estimates applied, not to be used for insurance purposes, not a reliable stand alone valuation, and noting the ca is provided upon request, but is given no consideration towards the final market value opinion.

If I had clients that actually cared about my opinions in the first place, the first thing I would do is tell them the cost approach is not a necessary inclusion to come around with the market valuation opinion.

A great deal more is "mailed in" than just cost approaches. Jay, focus on the driving factors which lead to the final opinion. I'm assuming that's not the ca, so other considerations like properly scaling net/gross with similarity to subject/comps comparisons are infinitely more relevant towards market value appraisal reviews, than ca's are.

Let's face it, without appropriate long form, even if the ca is done appropriately, it's difficult to distinguish that without reverse engineering the process. When the form demands long form fill in, then I guess at that point, I'll either demand scope change, or draw the necessary additional fee to perform those highly detailed analyses. If the standard is the peer standard, I'm probably on the curve, just by opening up an actual M&S book.

 

[CANative]

But how can these considerations be accurate, even if applied correctly, in markets rampant with flips and flops?

Why would either of the other two approaches be any better in a flip/flop market?

 

[Mile High Trout]

Why would either of the other two approaches be any better in a flip/flop market?

I meant that to go with the following line:

But how can these considerations be accurate, even if applied correctly, in markets rampant with flips and flops?

The notion of depreciation and obsolescence related to valuation and price, is an approach based on the presumption of reliable benchmarks for primary valuation.

In a flip/flop market - The individualized comparison with attention to detail on sellers conditions and practical availability of similar sales situations is key. I fail to see how that can be incorporated into extracted figures such as economic factors taken from whole market analysis. Unless, all sales were sorted in sub categories, and individual type of sale extrapolations made. Even two individual sales of similar homes in dissimilar sales situations examples yield starkly different results in volatile marketplaces. Until verifiable benchmarks return with steady supply/demand/and acceptance, extrapolated results are less reliable, while a limited selection of straightforward matches is more reliable.

In a speculated flip flop market, it seems likely that the income approach would probably be the most consistent analysis. The market valuation would be subjective, but still would have bifurcated examples. The whole market and subsequent considerations would take into account the broadest array of considerations and variances.

How does one consider the extrapolated economic obsolescence between a fannie owned bank sale, and a boa short with two lein holders who cannot agree? How does that stack up against a non distressed listing that reduced to drive a sale? Personally, I don't hold much stock in such considerations. Market valuation appraisal is about what it's worth today, in today's market. That means the most recent relevant examples are given primary consideration towards the final valuation opinion. 4-6 comp examples have been, and will continue to be the best examples in most suburban and urban residential marketplaces. The EO is built in to the market value, by way of buyers acceptance. Formulating some fancy ca analysis would essentially be derived from known mv considerations anyways, would it not?