Deep Dive - The Cost Approach

[Terrel L. Shields]

why the cost approach can't reliably achieve credible results without sales data,,,,,How many start their unsupported guesses for functional obsolescence at near 90-95%?

Yes, sales data are useable, but how do you value a property like that without using cost related adjustments in the SA?

I mean you have the issue of land value - and if on a fishable river, I'd be surprised if the land doesn't sell - in part at least- on the basis of front-footage of riverfront. Once you've determined the land value, you've got to do the same with the comps - determine their land values for a $4$ adjustment. then you have got the issue of buildings.

I am going to rank the buildings by age and value with the house the top priority. In a sort of curb appeal assessment, then ask myself, "which buildings actually move the needle?" The machine shed? The hay barn? The stables and indoor arena? The shop? I am probably going to say the largest and newest will contribute something. But people focus on the house, and I generally would apply little or no FO for the dwelling. So, what's that value? Then the outbuildings have to be allocated to the rest. And so, if I run the RCN - physical depreciation, then the allocation has to apply any deficit to FO.

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Barn $100,000 RCN
20% PD (say, 10 years old 50 year TEL)
Net $80,000'
Allocation 40,000
FO 50%

Unity of application comes into play. Each comp and the subject should be analyzed the same way.

 

[TerryRohrer]

Yes, sales data are useable, but how do you value a property like that without using cost related adjustments in the SA?

I mean you have the issue of land value - and if on a fishable river, I'd be surprised if the land doesn't sell - in part at least- on the basis of front-footage of riverfront. Once you've determined the land value, you've got to do the same with the comps - determine their land values for a $4$ adjustment. then you have got the issue of buildings.

I am going to rank the buildings by age and value with the house the top priority. In a sort of curb appeal assessment, then ask myself, "which buildings actually move the needle?" The machine shed? The hay barn? The stables and indoor arena? The shop? I am probably going to say the largest and newest will contribute something. But people focus on the house, and I generally would apply little or no FO for the dwelling. So, what's that value? Then the outbuildings have to be allocated to the rest. And so, if I run the RCN - physical depreciation, then the allocation has to apply any deficit to FO.

​

Barn $100,000 RCN
20% PD (say, 10 years old 50 year TEL)
Net $80,000'
Allocation 40,000
FO 50%

Unity of application comes into play. Each comp and the subject should be analyzed the same way.

In this case, the outbuildings likely have negative contributory value. A sale about 12 miles away on the same river with a 1,600 ft² dwelling and a 4,800 ft² shop on 103 acres sold for $1.8 million in 8/24. I would bet you could sell the buildings to be removed by the buyer, split the small home off on a couple of acres, and sell it for nearly a million more than they are asking.

 

[Terrel L. Shields]

I would bet you could sell the buildings to be removed by the buyer, split the small home off on a couple of acres, and sell it for nearly a million more than they are asking.

A property is valued as a whole. So, dissecting a property to sell might bring more but at what cost? And unless the sale price is lower than the value of the land as vacant....well, that's a HBU issue, right? So, I'd be revisiting my land value to conform it and I bet the buildings do contribute something even if marginal...and they also might have something to do with the buyer pool being small and I bet marketing time is large.

Do you get Open Fences magazine? Lots of over-priced properties listed.

 

[Mike Ault]

In this case, the outbuildings likely have negative contributory value. A sale about 12 miles away on the same river with a 1,600 ft² dwelling and a 4,800 ft² shop on 103 acres sold for $1.8 million in 8/24. I would bet you could sell the buildings to be removed by the buyer, split the small home off on a couple of acres, and sell it for nearly a million more than they are asking.

That's what I always think when I see huge shop buildings. They better be refining gold in there just to pay for the taxes, insurance & utilities associated with them.

 

[TerryRohrer]

A property is valued as a whole. So, dissecting a property to sell might bring more but at what cost? And unless the sale price is lower than the value of the land as vacant....well, that's a HBU issue, right? So, I'd be revisiting my land value to conform it and I bet the buildings do contribute something even if marginal...and they also might have something to do with the buyer pool being small and I bet marketing time is large.

Do you get Open Fences magazine? Lots of over-priced properties listed.

There are homes that are comparable in size and quality, but on a few acres or less, that are approaching $2 million. Based on the sales above, the land is likely worth upwards of $700,000, so already probably $500k more that the dwelling sales. The dividing it up would be what I would do if I owned it. But I would wager the big house and land, without any of the other improvements, is worth their asking price as is. And the owners only had the privilege of paying high taxes for 14 years, with no appreciation in their asset.

 

[TerryRohrer]

That's what I always think when I see huge shop buildings. They better be refining gold in there just to pay for the taxes, insurance & utilities associated with them.

Here, a pretty good size shop can contribute, for sure, but if you spend more than about $2 million on a residential property, you probably won't get all of your money back. The last one I did, with 11,000 square feet of garage and shop, I probably ended up concluding it contributed about half its cost (the owner was too embarrassed to tell me what the shop cost). And the slab for another 4-5,000 square foot shop had been poured.

 

[Terrel L. Shields]

The fun ones are a surplus of buildings along with a dwelling that has a huge of functionality issues itself. Like the one I did that had an indoor swimming pool, bar room, game room, indoor glass enclosed BBQ kitchen, a humidity controlled conservatory for exotic plants