Deep Dive - The Cost Approach

[CGinMN]

They started at $1,699,950 and it expired at $1,450,000 after 51 DOM. Then they came back on at $1,450,000 with a different agent.

That makes more sense. The first transaction is suspect and skewed high, second transaction is more realistic. That is 16% difference.

It is not unreasonable to think that any sale in the neighborhood could have sold for 10-15% more or 10-15% less depending on things that have nothing to do with property characteristics. The market is just like that.

I think that is too much variation in most markets. Those other transactions are within 0-6% which I would say is more reasonable.

 

[Joe Flacco]

Those other ones are basically land, so fewer things that matter I guess. Not as much wiggle room when at the floor.

 

[alebrewer]

I never said the adjusted range was not important. I already said I agree with you in most cases. You're asking about other cases, so I'm explaining. I can give you more examples too. I can probably drum some up from the real world. It happens not infrequently in rural and high-end markets.


You still don't understand, so I’ll give you a visualization to help you better.
View attachment 92199
How much would you tinker with sensitivity in order to tighten this up? Would you make the garage stall adjustment $12,400? Or would you reduce the GLA adjustment to $35/sf first? At a certain point, this is overfitting. Are you saying my adjustments are incorrect because they don't narrow the range? Sensitivity analysis is not meaningless. But may not be as useful in certain scenarios and can be susceptible to overfitting.

The visual helped a ton!! I did a grid - trying to incorporate your scenario - and it just didn't work. And your scenario will actually distill down to a $0 adjusted range, but to your point - I agree that it would take 'overfitting' as you say (I like that term). I can get down to about a $300 range without having to overfit, and $0 overfitting. And by overfitting, I mean using $33/foot GLA factor (instead of $30 or $35).

Back to my point about hyperbole, though, this is not really an example of the range getting 'wider' after adjustment - technically, yes, but realistically, a $300 range is the same as a $0 range. My point was (and I know you know this) that the goal of ANY SCA analysis is to minimize the adjusted range. Even you are attempting to do so in your scenario - as well you should.

BTW - wouldn't you agree that, even if you 'overfit', it is more supportable from a quantitative perspective than using 'judgement'?

FTR - here's what I came up with:

 

[alebrewer]

How tight of an adjusted range are you guys typically working with?

I'm pretty happy if I can get to a 10% adjusted range.

agreed w/CG - it depends on the quantity and quality of data. If a 10% spread is the norm for you - you definitely work a challenging market. It's the rural stuff where I appraise that I typically see adjusted spreads that wide.

 

[alebrewer]

As an aside - isn't regression EXACTLY the same thing as minimizing the adjusted range? If one argues that minimizing the adjusted range isn't what we're trying to do, they're really arguing that regression isn't an accepted methodology, right?

 

[CGinMN]

What happens in regression when you have negative coefficients? How does that translate to the SCA?

BTW I’m not disagreeing that narrowing the range is the goal of analysis, it is. I’m just saying that there’s a margin of error, and there are scenarios when it doesn’t happen. No need to really discuss it any further.

 

[alebrewer]

What happens in regression when you have negative coefficients? How does that translate to the SCA?

BTW I’m not disagreeing that narrowing the range is the goal of analysis, it is. I’m just saying that there’s a margin of error, and there are scenarios when it doesn’t happen. No need to really discuss it any further.

Haha! I really appreciate the banter. Thank you. I have learned something today - that's always a good thing. I agree - there are scenarios where the range might not get tighter, and will incorporate this into future deliberations. Still don't know whether I'd see this in a residential scenario, but still - much appreciated.

 

[Ricky LaFleur]

I really appreciate the banter

There's less good discussion of appraisal related topics on the forum these days. I enjoy it, too. Defending your position forces you to think through it and hopefully improve it in the process.