Cost Approach and those who "mail it in"

[PropertyEconomics]

PE...that word "Correct"...please re read my post. There is a problem using his mehtod to the cost approachs, simply subtracting the land from price and the remaining is cost to build plus PE.

That is backing into the CA...you are suposed to do land ext, cost to build including contractor/builder profit. Now, is there a difference between that and resales? If there is a difference, it is irresponsible to simply add in the difference as PE/ because the new home sales prices may be inflated for many reasons...builder cashback, builder financing where they "control" most of the appraisals and the clueless outside appraisers base their values on all builder new home sales, , are the new homes sales holding up against resales of newer homes in community and so on.

Check if the new home subject sales price is market supported before assuming the PE is legit and should be added into the cost to build.

Its not backing into anything .. it is market measurement of EP ... read what he stated .. he is not arguing for development of a cost approach .. he is describing a market method of measureing EP .... and yes it is correct.

The sales price is a market piece of evidence ... and market value references PRICE ... read it again ... whether a particular home has EP or not is the meaning of Terrel's post.

Again its not building a cost approach it is measureing whether EP is present in the market. This has nothing to do with the subject but is a measurement from the COMPARABLE!!


Sales Price $100,000
Land Value $ 20,000
Impvt Value $ 80,000

Impv Size 1,000 sqft
Cost New $ 75/sqft
Impvt Cost $ 75,000

Impvt Value $ 80,000
Impvt Cost $ 75,000

EP $ 5,000



Now ... lets assume the EP is negative .... what do you have then??

 

[J Grant]

Just as an aside to any individuals' post or view point, where in USPAP, or any appraisal guidelines does it recomend adding in EP or EI to the building cost, even after taking into account the builder profit already factored into the Cost per SF?

Where does the support for this methodlogy come from (besides the appraisers who choose to extact and use it)

 

[J Grant]

Its not backing into anything .. it is market measurement of EP ... read what he stated .. he is not arguing for development of a cost approach .. he is describing a market method of measureing EP .... and yes it is correct.

The sales price is a market piece of evidence ...

This goes to the heart of appraising...an appraiser is not supposed to take the sales price of a subject as gospel evidence that the sales price is MV...otherwise why hire the appraiser at all?

The appraiser is suppposed to test the subject sales price against similar legit home sales, and see how it holds up against resales if the subject is a new home builder sale, and compare it to pending and active listings that are resales, and compare the subject price to home sales outside builder community.

The sales price is a piece of market evidence, and Market value references PRICE ...

MV in appraisal terms is not just about price, as you very well know!! It seems your methodlogy assumes the subject price is correct simply because it exists as a piece of market evidence, and then is done around supporting the subject price, which iin the CA, means extracting EP from the subject sales price, to account for the gap between the true, lower CA, which already includes a generous builder profit.

Read it again ... whether a particular home has EP or not is the meaning of Terrel's post.

My point is, should an appraiser assume the EP is legit , and should it be added back into the cost approach after an appraiser "Correctly" extracts it from the subject sales price?

Again its not building a cost approach it is measureing whether EP is present in the market. This has nothing to do with the subject but is a measurement from the COMPARABLE!!

What comparable? Another builder new sale comparable that sold at the same or similar subject price? We still don't know if this comparable sale price should be adjusted DOWN for excess builder profit not supported by the resale market, or adjusted DOWN for builder cash back or other incentives built into the price etc.

Rather than investigate whether the comp sales price should be adjusted down, you are assuming it is MV, and then subbtracting out an EP figure , and the figure is added back into the subject CA to support the subject sale price. It is a circle created by the apprasier to "prove" the CA supports MV ( which in actualiy, the CA does not support MV without the addition of the appraiser derived EP)


Sales Price $100,000
Land Value $ 20,000
Impvt Value $ 80,000

Impv Size 1,000 sqft
Cost New $ 75/sqft
Impvt Cost $ 75,000

Impvt Value $ 80,000
Impvt Cost $ 75,000

EP $ 5,000

The above example, I get the math. The math and method of how you got the EP is not my issue. My issue is, this method means an appraiser accepts a subject sales price as gospel truth and then "Correctly" extracts out EP (the missing number from cost to build and sales price), then adds it back into cost to build to support the sales price!! Is this "correct" method then, just a means of supporting the sales price, before the sales price is proven by the appraiser to be MV?

Now ... lets assume the EP is negative .... what do you have then??

Negative EP is not the appraisers' problem. That is the builder's problem, and then the EP becomes negative, builders stop building and new construction is abandoned.

 

[JSmith43]

you can't separate an appraiser deciding to hunt for PE,

It's a screen name. New Mexico is pretty big (area wise). He will be hard to find

In your post, there was quite a bit of concern for error in measurement toward the up side based upon condition of sale (flopping, secret cash back, etc). But, I see no balancing concern for down side errors (REO's at fire sale prices, even though the fire sale is particularly big and long lasting in some areas).

If you can get a grip on what Ter & PE are saying with respect to Cost Approach theory, it will elevate you above the crowd, IMO. Sincerely.

Understand the theory first, then, from that position of fundamental strength, criticize it for its shortcomings to your hearts content. But, get a grip on the actual theory (the whole picture) first.

My view of the practicality of the CA in an active market, is almost as cynical as Elliot's view:icon_mrgreen: But, an appraiser really should understand the theory, which has not been presented well over time. EXAMPLES:

"The Cost Approach tends to set the upper limit of value" is a widely quoted myth, for example. In reality, replacement cost/reproduction cost (not cost approach) tend to set the upper limit of value over time & the CA might tend to support the upper limit of value during certain market trends. The quoted rule of thumb sucks.

Some F & F conforming underwriters went bonkers when the CA indicated a lower value than the SCA. Generations of seat of the pants educated appraisers must have decided that the CA tends to set the upper limit of value, say the 800 pound gorilla. That's what I think dumbed them down to the F & F reality. And, I believe plenty of F & F conforming UW/lender employees knew better, but couldn't rock the boat if they wanted to.

 

[JSmith43]

Is this "correct" method then, just a means of supporting the sales price, before the sales price is proven by the appraiser to be MV?

Someone else want to address this? I have to do a load of laundry.

 

[David Mescon]

J Grant, essentially, you're questioning the validity of the data from which any possible intangible EO might be extracted. Do you scrutinize the data utilized in your SCAs to this same degree? How do you know whether there were some unknown nefarious conditions or motivations affecting your SCA data? Here, I'll answer for you - it would be reasonably assumed you did your homework and vetted each sale through a combination of public records, MLS and/or personal verification with one or more parties to the transaction. If you have vetted your data thoroughly and appropriately, you could apply the simple methodology Terrel offered, and PE elaborated upon, to extract any possible external obsolescence. Assuming there is no tangible external obsolescence, any EO you end up with would automatically be intangible EO.

 

[PropertyEconomics]

Negative EP is not the appraisers' problem. That is the builder's problem, and then the EP becomes negative, builders stop building and new construction is abandoned.

Negative EP is absolutely an appraisers problem ... for heavens sakes JGrant ... negative EP shows what .... hold on for it ....


yes thats right ... External Obsolescence ....

You should read more on the cost approach and methods of estimating market derived indicators ... seriously and with all due respect it would benefit you greatly as an appraiser and also allow you to offer others good advice here on the Forum.

There are people on this Forum, ie Calvin, Terrel, Rex, Michigan, Mentor, and many many others who you will learn understand appraisal theory very well and are capable of imparting their knowledge ... but you have to read what they offer and not merely dismiss it because its different than what you believe or what you were taught .... Terrel and I have tried to show you how things are measured from the market but you wish to jump to other topics that we are not addressing. I assure you none of the above would advocate for misuse of the data ... we are merely showing you how the data is determined from market indicators.

 

[J Grant]

Negative EP is absolutely an appraisers problem ... for heavens sakes JGrant ... negative EP shows what .... hold on for it ....


yes thats right ... External Obsolescence ....

Yes, thank you...and the external (economic) obsolesence is addressed throughout the appraisal,...by declining sales prices, and reporting on that,, by the lower prices of the comps, by market conditions oversupply, ending up with a lower MV when EO is present.

So yes, an appraiser accounts for the economic EO in the SCA approach, and in the income approach where the EO would be seen in lower rents and high vacancy rates.

The question is, should the economic obs also be subtracted from the CA to yield a lower value that matches or is within a few k or the SCA value, or should the CA be left as a cost indicator of value, and not necessarily a market indicator of value?

I do appreciate the posts from the appraisers you mention explaining the theory. Since as per this OP, many appraisers are not applying EO to the cost approach, do you suppose they might have a legit theory as well, or do you assume any appraiser not taking EO from the CA is just clueless and too dense to understand why?

 

[David Mescon]

Since as per this OP, many appraisers are not applying EO to the cost approach, do you suppose they might have a legit theory as well, or do you assume any appraiser not taking EO from the CA is just clueless and too dense to understand why?

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.

 

[PropertyEconomics]

Negative EP is absolutely an appraisers problem ... for heavens sakes JGrant ... negative EP shows what .... hold on for it ....


yes thats right ... External Obsolescence ....

Yes, thank you...and the external (economic) obsolesence is addressed throughout the appraisal,...by declining sales prices, and reporting on that,, by the lower prices of the comps, by market conditions oversupply, ending up with a lower MV when EO is present.

So yes, an appraiser accounts for the economic EO in the SCA approach, and in the income approach where the EO would be seen in lower rents and high vacancy rates.

The question is, should the economic obs also be subtracted from the CA to yield a lower value that matches or is within a few k or the SCA value, or should the CA be left as a cost indicator of value, and not necessarily a market indicator of value?

I do appreciate the posts from the appraisers you mention explaining the theory. Since as per this OP, many appraisers are not applying EO to the cost approach, do you suppose they might have a legit theory as well, or do you assume any appraiser not taking EO from the CA is just clueless and too dense to understand why?

If there is a published legitimate theory for not deducting all forms of depreciation (obsolescence) from the cost approach, in a typical market value appraisal, I would be happy for you to provide that to us so we may read it.

Unfortunately you have answered your own question because sadly it does appear too many appraisers are either clueless, or dense, or lazy ... no matter the reason ... its unfortuate because without reflecting all forms of obsolescence within the cost approach .. the approach, and it could be argued the appraisal report, could be considered misleading.