Deep Dive - The Cost Approach

[CGinMN]

I'd disagree a bit and say that the exception is when there is no obsolescence or depreciation. As stated in an earlier post, when you annualize the depreciation on a 1-5 year old home, it will result in an understatement of the TEL (and hence the REL), as the front end of an improvement's life cycle bears a heavier depreciation load than the back end. Would you agree?

Not entirely. In a short supply market yes. In fact, in some markets in 2021, I would swear to it that previously owned C2s in some markets were selling for more than otherwise similar C1s just because the C1 took 12 months+ and there was uncertainty with supply and labor bottlenecks. I guess that's EO impacting the C1s. In a balanced market, I have observed physical depreciation often runs pretty close to straight line. This is just my general observation and isn't based on any in depth study. (I use obsolescence to describe all forms including physical depreciation.)

I've always performed sensitivity analysis in conjunction with other techniques (grouped sales/regression), so that - theoretically - you've solved all the other residual issues prior to engaging the analysis for the bracketed feature you're applying sensitivity to. More often than not, there tends to be some fine tuning as the analysis develops - e.g., I'll use sensitivity for GLA, then maybe have to go back and tweak the sensitivity for site (or the paired sales adjustment for garage/bath/etc.).

This is a good way. I typically solve my adjustments based on the degree of confidence, which is the result of quantity and quality of data available. That usually means market conditions first, followed by GLA, garage, and sometimes site characteristics and amenities. This narrows the range considerably, and then I fine-tune the other adjustments, which may involve slight refinements to the previously reconciled adjustments.

 

[Surf Cat]

I wonder if waivers perform a cost approach to value....

 

[alebrewer]

In a balanced market, I have observed physical depreciation often runs pretty close to straight line. This is just my general observation and isn't based on any in depth study. (I use obsolescence to describe all forms including physical depreciation.)

In my market(s), it's exactly the opposite. There will typically be a 3-5% (sometimes higher) 'hit' for being a used home. I've always attributed that to the owners not getting to pick the color scheme, first ones to use the toilets/showers, etc. And while that's technically not 'depreciation' - in reality it is... whether you call it a new construction premium, or some other moniker, it's similar to buying a new car - once they're off the lot, they're now a used car and will take a pretty good hit.

 

[sputnam]

As a standalone approach, or in conjunction with one or more of the other approaches? IOW - let's say you 'spent the time learning', do you think you could develop an accurate (however you define that) estimate of MV based JUST on the CA?

Both. For example... M&S cost data doesn't include entreperneurial profit or interst charges that ultimately get passed on. We aren't required to be accurate. We are required to be credible and support our opnions. Most appraisers of my acquaintance want to be accurate as well... but at the end of the day, it is the appraiser's opinion. And, there are times when a high degree of accuracy just isn't on the table.

I think two things are generally true. A lot of appraisers (especially residential appraisers) have never learned how to do the Cost Approach properly and most appraisers have been indoctrinated to believe that the Cost Approach is without much value.

 

[Terrel L. Shields]

never learned how to do the Cost Approach properly and most appraisers have been indoctrinated to believe that the Cost Approach is without much value.

I trained under people who did not believe in doing less than 2 approaches on any project.

 

[sputnam]

I trained under people who did not believe in doing less than 2 approaches on any project.

Ditto. If nothing else, completing the Cost Approach can help support adjustments in Sales Comparison Analysis.

 

[TerryRohrer]

If nothing else, completing the Cost Approach can help support adjustments in Sales Comparison Analysis.

A process that diminishes the credibility of both. But, to each their own!

 

[sputnam]

A process that diminishes the credibility of both. But, to each their own!

I disagree. Properly applied using good data sources, the Cost Approach is quite credible. I agree though, depreciated cost analysis should not be the go to for deriving adjustments. We all forget sometimes, all of the approaches typically used in residential appraisals are market based... at least when they are done correctly.

 

[Terrel L. Shields]

I don't know how you value unique items rarely encountered except by depreciated costs. There is rarely any real way to "extract" a value and does a single such "paired sale" really represent market?

 

[TerryRohrer]

I disagree. Properly applied using good data sources, the Cost Approach is quite credible. I agree though, depreciated cost analysis should not be the go to for deriving adjustments. We all forget sometimes, all of the approaches typically used in residential appraisals are market based... at least when they are done correctly.

Nothing in my comment was intended to suggest the cost approach is not a valid approach.