Deep Dive - The Cost Approach

[alebrewer]

Nothing in appraisal is "accurate". But depreciated cost at least supports the value estimate. Putting down nothing does not. PFA does not.

I think you know well what I mean when I say accurate. There is a difference between 'supportable' and 'accurate' (or spot on, or in the bulls eye, or on the mark) - whatever nomenclature you want to use when speaking of estimating a value that is at, or very near, what the market would place on that item. And while depreciated cost may be supportable, without sales verification, there is no way to tell whether depreciated cost is at, or very near, what the market would place on that item.

 

[Mike Ault]

Actually... the rule of thumb that I posted works very well. The % can vary.. but the method works. As I stated, I wouldn't use it as the only indicator.

Long ago I attended an appraiser meeting at our FHA Regional Field Office where they instructed us all to use 50-75% of the RCN of the dwelling for our GLA adjustments. Falls in line with your "rule of thumb".

 

[Terrel L. Shields]

And while depreciated cost may be supportable, without sales verification, there is no way to tell whether depreciated cost is at, or very near, what the market would place on that item.

Yes and no, maybe. If you know people build pools, or you know a shop building brings value, what about when you have no similar pool or shop. i appraised a shop building one about 1,600 SF. It has a small office, a bathroom with shower, and was entirely air-conditions with 40x10 lean to sheds on each side. And the floor was a commercial resin non-slip floor (TUFCO) Was it over-built? Yep. Was it uncommon to have a 1,600 SF shop? Nope. So, how do you value it? What comp is comparable?

Pools ditto. Does it have a pool room? Showers? A sauna? lights in the pool? Fencing? Lots of concrete around it? Inquiring minds want to know. Or, do we just adjust them all for $x as if all pools were identical? I mean you still have to compare and analyze the comp pools too, right?

 

[alebrewer]

Yes and no, maybe. If you know people build pools, or you know a shop building brings value, what about when you have no similar pool or shop. i appraised a shop building one about 1,600 SF. It has a small office, a bathroom with shower, and was entirely air-conditions with 40x10 lean to sheds on each side. And the floor was a commercial resin non-slip floor (TUFCO) Was it over-built? Yep. Was it uncommon to have a 1,600 SF shop? Nope. So, how do you value it? What comp is comparable?

Pools ditto. Does it have a pool room? Showers? A sauna? lights in the pool? Fencing? Lots of concrete around it? Inquiring minds want to know. Or, do we just adjust them all for $x as if all pools were identical? I mean you still have to compare and analyze the comp pools too, right?

exactly my point. If you base the contributory value on functional utility (derived from the market), you get one 'value'. If you base the contributory value on depreciated cost - you're most likely going to get an exaggerated estimate of value for an overimprovement - and without sales to extract the functional superadequacy adjustment, how do you do so?

 

[CGinMN]

I think you know well what I mean when I say accurate. There is a difference between 'supportable' and 'accurate' (or spot on, or in the bulls eye, or on the mark) - whatever nomenclature you want to use when speaking of estimating a value that is at, or very near, what the market would place on that item. And while depreciated cost may be supportable, without sales verification, there is no way to tell whether depreciated cost is at, or very near, what the market would place on that item.

We talk pretty regularly about how market value as a concept is best expressed as a range of possible outcomes. I think in most cases, if using adjustment rates that are developed via depreciated cost/age-life, you will get within the range. The cases where functional obsolescence is a present, it is probably not a good idea to use depreciated cost unless you have good support for FO. WRT a pool, regression might measure FO, but not physical depreciation, so there's a tradeoff.

 

[The Bob]

Yes and no, maybe. If you know people build pools, or you know a shop building brings value, what about when you have no similar pool or shop. i appraised a shop building one about 1,600 SF. It has a small office, a bathroom with shower, and was entirely air-conditions with 40x10 lean to sheds on each side. And the floor was a commercial resin non-slip floor (TUFCO) Was it over-built? Yep. Was it uncommon to have a 1,600 SF shop? Nope. So, how do you value it? What comp is comparable?

Pools ditto. Does it have a pool room? Showers? A sauna? lights in the pool? Fencing? Lots of concrete around it? Inquiring minds want to know. Or, do we just adjust them all for $x as if all pools were identical? I mean you still have to compare and analyze the comp pools too, right?

I think this is the drawback with using DC, alone, to value a feature. If the feature is common in the market it's more likely to add value. Likewise, if it's not a common feature, it may not add anywhere close to the RCN. One "trick" or hack you can use is to allocate the value of 2 or more features via DC. For example, you have a house with a deck and garage and none of your comps do, you could estimate the RCN for those 2 items and allocate those costs proportionately, after depreciation.

 

[alebrewer]

Exactly. If you can't quantify a feature's contributory value via market participation, is it possible that is the market telling you the feature doesn't have contributory value in that particular market?

 

[Terrel L. Shields]

is it possible that is the market telling you the feature doesn't have contributory value in that particular market?

So, pools and shops become invisible when they obviously aren't? But clearly there is a different impact between one air-conditioned shop /garage and one simple shell of the same size and I defy anyone to find true "matched pairs" to extract a value. Buyers are totally oblivious to the difference? What if I told you I know folks who sought to find a house she was happy with and with a shop building he was happy with you wouldn't believe me. Right?

 

[alebrewer]

So, pools and shops become invisible when they obviously aren't?

Well, I asked a question - I didn't say anything becomes invisible, right? Let's use the 3rd one you proffered - the one with three bays on the front. That is obviously superadequate for a residential property. Without direct sales comparison analysis, how do you estimate the functional superadequacy adjustment if that big boy was sitting in the back yard of a residential property?

And to my point - it never means something is invisible. It MAY mean, however, that the market affords no contributory value for said amenity. However you slice it, depreciated cost doesn't necessarily equate to value.

 

[TerryRohrer]

The link below summarizes the poster child for "depreciated cost of components likely doesn't reflect their contributory value." I believe it cost in the neighborhood of $20 million to build. Went on the market for about $16.5 million, ended up selling for $7.5 million. My opinion is that it would not have achieved that lofty price had the buyer not very recently closed on the $12.5 million sale of a local mobile home park. Prior to this sale, there were 28 residential sales in the local MLS (11 years of data) that closed for more than $1 million ($1.1m-$1.975m, averaging $1.31m with a median of $1.2 million). I thought at the time the value would be at or slightly above the upper end of that range. Since this mansion sold, there have been 88 sales between $1m and $2.5m (and almost identical average of $1.36m and median of $1.2m). I wouldn't want my name on a report that included the summation of a laundry list of depreciated costs of amenities not represented in the local market.

A 31,000-Square-Foot Montana Castle With 10 Bedrooms and 19 Bathrooms

Amenities include three pools, a bowling alley, an indoor shooting range—and a moat

www.mansionglobal.com