Deep Dive - The Cost Approach

[alebrewer]

the sales comparison is the only approach that can stand on its own. The cost and income approaches rely on sales comparison

Technically correct. I see it more as the SCA and IA being derived from market participation, while the CA is primarily derived from cost guides.

 

[Artemis Fowl]

Technically correct. I see it more as the SCA and IA being derived from market participation, while the CA is primarily derived from cost guides.

...and those cost guides are developed by market participation at the component level...like a builder would do.

 

[alebrewer]

...and those cost guides are developed by market participation at the component level...like a builder would do.

ok

 

[Ricky LaFleur]

I just wouldn't say it accurately reflects the subject's true market value without validation from the SCA.

I don't disagree, but cap rates and incomes are extracted directly from the market - not from a cost guide. IOW, the following is what you get from the cost guide (and assume it's accurate): TEL, local multipliers, PPF new for both improvements and outbuildings, quality rating, cost multiplier, and - depending on level of breakdown - Cost new of any components. That's a LOT of info you 'assume' to be correct (or a lot of info you're able to manipulate - depending on how you see the CA). On the IA side, how do you get cap rates? Market sales prices and market rentals, right? How do you see that as being similar to the vagaries of the CA components?

My argument is that each approach should not be developed with horse blinders on to avoid being "tainted" by other information from the other approaches. They naturally rely on one another in various ways as you circle the problem to be solved. That website I linked has a good article that already better articulates why (couldn't post the pdf, too large).

 

[alebrewer]

My argument is that each approach should not be developed with horse blinders on to avoid being "tainted" by other information from the other approaches. They naturally rely on one another in various ways as you circle the problem to be solved. That website I linked has a good article that already better articulates why (couldn't post the pdf, too large).

View attachment 92115

Sounds like you've convinced yourself. That's a good thing.

 

[BRCJR]

The M&S costs are from a sampling of final building costs of dwellings actually built.

If an Appraiser really knows their local market, they should be capable of determining if the published cost data is below, at, or above their market.

There is nothing that prohibits an Appraiser from using the district multiplier and local multiplier AND then including their more micro market multiplier for refining the cost figures.

I am more of the camp most do not properly complete the cost approach because to do so takes more time than the client (FNMA/Fredie in many cases) are willing to pay one for.

For example, most think 60 years, based upon the review of many 1000's of URAR's, is the number of years for a residential dwelling to be used in calculating depreciated RCN. It is not always the starting point. I reference E-15 of the current M&S Residential Handbook for your reading pleasure.

Unless it is truly Cookie Cutterville, in a tract development, adjusting in a sales comparison grid has some subjectivity embedded. Thus, the sales comparison is not pure unadulterated indicator of value, either.

Values are opinions and no methodology is so scientific it is not flawed, period.

 

[TerryRohrer]

My argument is that each approach should not be developed with horse blinders on to avoid being "tainted" by other information from the other approaches.

While I don't draw any hard and fast lines anywhere, I think this is more a choice than a necessity, primarily due to expediency. Clearly dependent on the property and the market and the available data.

 

[alebrewer]

Unless it is truly Cookie Cutterville, in a tract development, adjusting in a sales comparison grid has some subjectivity embedded. Thus, the sales comparison is not pure unadulterated indicator of value, either.

Values are opinions and no methodology is so scientific it is not flawed, period.

True. However, the SCA isn't verified by the CA - it's the other way around. In which case, development of the CA becomes not only an exercise in futility, but also exposes the developer to additional scrutiny by their respective state board. And, while it is (always) true that point value precision is not possible with SCA, the range of value developed within the SCA should be fairly accurate. Within that range, however, any one point is probably as valid as the next.

 

[CGinMN]

How so? They all rely on sales, yes.

That’s what I mean.

When I do a cost approach, my sales comparison and income approaches are irrelevant (my site adjustments in the sales comparison approach are almost never based on vacant site sales). I don't object strongly to any of the approaches, but I do not practice using one to complete the other as I think that tends to diminish them all.

I can see the argument for that, and I’ve thought about it before and I disagree. If you are using the strongest data for each approach, then it will happen that the approaches are inbred. You generally cannot keep them entirely separate. If you try, you will be weakening an approach. The each approach is going to give you a different value indication to reconcile. Instead, if you intermingle the approaches and use the strongest adjustments, the reconciliation is mostly done at the adjustment level. Depreciated cost says $130 for GLA, regression says $150, I reconciled $145… and so on.

 

[CGinMN]

Technically correct. I see it more as the SCA and IA being derived from market participation, while the CA is primarily derived from cost guides.

A cost guide is just a survey. Costs can come from comparable builds in the market. This is the best data to use, in which case the cost data would be derived directly from market participation. Income data can come from surveys as well.