Cost Approach "violation of USPAP"

[Jo Stinett]

Hi kpmalone, thanks for the input. I knew sooner or later I would get blasted but I thought it would be because my status says "Licenced" and not "Certified". I just haven't updated my status since I don't post that often. I typically complete a cost approach for all of my appraisal assigments to better analyze the opinion of value, principle of substitution, and possibly indicate a declining/increasing market. I also typically include it in my reports to further support the value conclusion depending on the SOW and if the CA affords a credible report (also with an insurance disclaimer). I have had a few occurrences where I was unable to obtain or quantify information to provide a credible cost approach and if such was the case then it would not be included in the report. With that said, I am just getting a bit burned out with those appraisers who insert boiler plate comments to absolve them of what I consider due diligence. This forum can be a great place to get feedback from others, particularly in the review area since sometimes we can get critical based on our own interpretations and perceptions. Have a great evening.

 

[LI-Appr]

JO
didn't mean for it to be a blast. But in these times reviewing is a heavy burden to bear. Alot of appraisers on here put notches in their computer every time they think they should report someone to the state board. You really have to disconnect yourself to be a good review appraiser. Not all of us can do this. Some of us should never even attempt to.

 

[Terrel L. Shields]

FHA used to require the income app on a high percentage of their properties and when i started no appraiser dared to do less than 2 approaches to value.

 

[mgalleshaw]

Back to the original post, I would say that excluding the Cost Approach based on the jusitification provided is a violation of USPAP, not the other way around. Get out the textbook and explain why the reasons the Cost Approach is usually applied don't fit in this case. And "cuz it's hard" is not good enough.
Did this appraiser try to write his demo yet? To me, it sounds like there is a general lack of knowledge and understanding of the benefits of the Cost Approach, the techniques and methodologies involved, it's basis in classical economic theory, and the relationship of data from the Cost Approach towards proper application of the other approaches. Or maybe its because someone figured out they could justify their lower fees if they cut out some of the work a competent appraiser feels necessary.
MGalleshaw

 

[Scott Lanz]

I have long contended that in my market the IA should be applied for SFR properties inside the town. The percent of homes that are rented is around 40% of the total inventory. Yet, I have never seen one.

Stating that something is a USPAP violation in an area that is subjective isn't the best route.

In regards to the statement about reviewing, I agree. Most appraiser's can't get past what they would do instead of whether or not the report is credible.

Appraiser's are funny creatures. Many seem to think that without there personal ability the entire real estate industry, and all mankind, is going to collapse.

 

[George Hatch]

- There are residential markets where the participants make decisions in part based on costs as an alternative to buying an existing home.

- There are residential appraisal assignments that involve proposed construction, where feasibility is very much an issue

- There are lots of assignments where one of the values being sought is "insurable value".

- There are lots of appraisal assignments that don't result in 3 comps within a 10-mile radius. Some of them are residential assignments.

- "Meaningful to the client" could create an assignment condition that adds elements that the appraiser might not otherwise choose to add. Those elements might not contribute to the appraiser's conclusions, but that doesn't justify blowing them off.

One way to describe that is "Cost Approach is included as a result of assignment conditions", in which cases its omission would probably amount to a problem at the SOWR level.

 

[Calvin the Airedale]

I've read appraisal reports where, once I'm finished, I don't know whether the appraiser is a genius or an idiot (though I more often surmise the latter as far as effective communication).

Funny you should make this comment, as I have often thought the very same thing. Sadly, however, it is often while reading a prior report I've written or a draft of a current assignment.

 

[CANative]

- There are residential markets where the participants make decisions in part based on costs as an alternative to buying an existing home.

- There are residential appraisal assignments that involve proposed construction, where feasibility is very much an issue

- There are lots of assignments where one of the values being sought is "insurable value".

- There are lots of appraisal assignments that don't result in 3 comps within a 10-mile radius. Some of them are residential assignments.

- "Meaningful to the client" could create an assignment condition that adds elements that the appraiser might not otherwise choose to add. Those elements might not contribute to the appraiser's conclusions, but that doesn't justify blowing them off.

One way to describe that is "Cost Approach is included as a result of assignment conditions", in which cases its omission would probably amount to a problem at the SOWR level.

Turn and burn, low fee mortgage appraisal assignment where the "instructions" (assignment conditions) state compliance with both USPAP and Fannie Mae are mandatory. Subject is a 65 year old house inside the city limits in a city which has been fully built out since the 1950's and there has been no residential lot sale for decades and no one ever completely redevelopes a residential lot. Intended use is GSE underwriting using forms with pre-printed certifications stating that the cost approach was not developed (unless otherwise stated) and GSE policy does not allow primary reliance on any value approach other than the sales comparison.

The income approach is predicated on the principle of anticipation and the cost approach is predicated on the princicple of substitution. In the case of the assignment described above there is no opportunity for substitution so how can a cost approach be credible or meaningful while on the other hand half of the buyers are investors and speculators anticipating a stream of income while awaiting a tidy profit on reversion after the holding period?

Yet these orders come in with assignment conditions ("instructions") mandating the completion of the cost approach. But never come in with similar conditions requiring an income approach. Clearly they're not interested in corroborating approaches. They're either after information for determining insurance amounts or they have a less than well-read person in charge of their collateral valuation department who is relying on an approach which was crucial 30 or more years ago but which has limited applicability for underwriting modern day loans.

My theortical case for USPAP violation is predicated on an appraiser accepting such an assignment condition (mandatory appraisal methodology) prior to identifying all of the elements needed to solve the appraisal problem.

 

[Aprazr]

Just curious....what ever happened to 'Extraction' when using Marshall & Swift as your guidelines? The cost approach is probably the 'easiest' portion of the entire 1004 process......when performed properly.

I see (on the reviews I do) that the appraiser 'rounds' the numbers & quotes M&S as the source. For a FACT, M&S has NO ROUNDED NUMBERS. You simply use the quarterly multipliers for your area and what the cost figures constitute for construction for the area then to get the land value....perform 'EXTRACTION'.

 

[Ross (CO)]

It may be all too often the reviewer's experience that they must comment and pick-apart those awkward statements and text passages that do not "sit well" with them.....or else they AGREE with what that appraiser has written.

Clearly, Jo has read a text passage that not only reads awkwardly but now presents a subtle invitation to draw her in to agree with the appraiser (and their statement about the lack of CA in this report, and "USPAP violation")......or else render her own comments to the contrary and perhaps INCLUDE some measure of a CA analysis in her review to provide this "applicable" approach (even when the first appraiser did not). I'm still trying to figure out what that appraiser means by "...accurate land sales" ! Did they intend to say "available" land sales, instead ? In some of the 50+ year old neighborhoods in this metro area there ARE NO VACANT LOT SALES for several decades, and surely not within the last few years, and not in the last 6 months.....and one can only snatch-and-haul some lot sale from an un-comparable market area miles away and drag it into the subject's defined market area and claim that it represents "land value" near the subject property,.....which it does not. - - One can also search the databases and find NO distress sale, tear-down, re-builds...in the normal course of business...and from which to extract a site value.

The client has ALREADY seen that no CA was provided, and perhaps may not have stipped the appraiser to "re-visit" their report......and include it ! The u/w could have discussed the lack of a CA as a possible diversion from the S.o.W. in the originally communicated engagement order and "instructions" for the assignment, or not. We will never know that. It does not take away from the awkwardness of that shared paragraph, anyway. That appraiser might have mollified the impact of their CA comments by inserting the words "...for this assignment" in two of the sentences rather than broad-brushing their overriding thoughts about the CA !

Will that day come in the years ahead, however, when any calamitous lack of truly comparable sales (to the subject) within the defined market area (of the subject) and/or in a certain window of months.......means that an appraiser DOES NOT GIVE WEIGHT to their Sales Approach in the report, and instead gives that primary weight of Reconciliation to their Cost Approach ? That will make the "insurance" side of the underwriting process hunky-dory....but will that lending decision be satisfied by a CA as the primary valuation anchor ? One wonders how many appraisers have ever concluded a "market value" opinion based primarily on a CA and telling their client that the SCA was "not reliable". Does anybody want to tell us here that they have done this (perhaps more than once)....survived the "reviews" of those reports....and still continues to get work from that client ?

Jo, what was the stated Intended Use of the report you are reviewing ? Was there a purchase pending on this subject property for which a mortgage lender wanted to know if it was better to re-build that 1958 house, with 1958 building materials and craftsmanship, and then make "accurate" depreciation calculations for the entire structure ?.....to see if their borrower was getting a "good deal" on the purchase price, or should go elsewhere to buy a diferent property.

After we're done discussing the Cost Approach let's talk about adjusting for concessions in the selling "price" of selected comparable sales !