Deep Dive - The Cost Approach

[sputnam]

In the spirit of the Forum, let's go off topic a little. One of the things that is a pet peeve, for me, is reviewing an appraisal report and the appraiser says 'insuffcient data for the Income Approach'. Then... a few days later... a different appraiser submits a report from the same neighborhood, same property type, and manages to find enough data to complete the Income Approach using the GRM method. You don't always need to develop the Income Approach but, when you don't even look for rental or GRM data you say that it was not necessary for credible assignment results.

And we wonder why lenders and regulators and the general public don't have a lot of respect for appraisers.

 

[Terrel L. Shields]

'insuffcient data for the Income Approach'

I see that in towns with 40% rentals or more.

 

[DTB]

While I can appreciate the academic arguments/fine point of CA, I've never seen a home buyer or seller go through those machinations when participating in the market.

Let us not forget how the market is made.

 

[CGinMN]

I don’t think an approach is only valid if market participants do it. I just think it needs to reflect the behavior/actions of market participants. Most market participants don’t really do any quantitative adjusting. If they do any, it would be a cost analysis, not regression or pairs.

 

[alebrewer]

I don't know how you value unique items rarely encountered except by depreciated costs.

I don't disagree that depreciated cost might be the primary means of assessing value for some components. I'm just saying that there is no way to tell if that adjustment is reasonable or not without going back to the SCA for verification...

 

[DTB]

I don’t think an approach is only valid if market participants do it. I just think it needs to reflect the behavior/actions of market participants. Most market participants don’t really do any quantitative adjusting. If they do any, it would be a cost analysis, not regression or pairs.

I beg to differ, IME buyers have a mental image of the sales comparison grid and DO make adjustments

 

[Artemis Fowl]

I don't disagree that depreciated cost might be the primary means of assessing value for some components. I'm just saying that there is no way to tell if that adjustment is reasonable or not without going back to the SCA for verification...

Why is that an issue?
Principles of Appraising 101. All three approaches are based on market comparison.
We can use proxy sales to derive adjustments when a feature does not manifest in comps. It's the same thing except for cost component or income related items.

 

[CGinMN]

I beg to differ, IME buyers have a mental image of the sales comparison grid and DO make adjustments

What do they base their adjustments on?

 

[DTB]

What do they base their adjustments on?

The properties that they have seen

 

[alebrewer]

Why is that an issue?
Principles of Appraising 101. All three approaches are based on market comparison.
We can use proxy sales to derive adjustments when a feature does not manifest in comps. It's the same thing except for cost component or income related items.

not an issue at all. I'm not trying to convince anyone of anything. My point was that, if depreciated cost is ALL you have (and I agree that is the case sometimes), and if the only way to quantify the validity of the adjustment is through sales comparison, yet there are no sales with which to quantify the depreciated cost adjustment, then you really have no idea whether it's accurate or not. Which goes back to my original point that the CA really doesn't have a lot of merit (on the residential side) as a stand alone approach.