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Does an appraiser have to use just one approach?

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blboyd77

Thread Starter
Freshman Member
Joined
Jan 23, 2008
Professional Status
General Public
State
Texas
My parents are looking to re-fi their home, and the appraiser is only using the market value approach to obtain a valuation. The valuation appears to be on the low side for this market, since hardly a home is for sale in their upscale neighborhood. The valuation may be valid, but my question is this: should an appraiser base the appraised value of a home primarily or only on market value (apart from cost approach, etc.)?

Any insight is greatly appreciated!

- Bryan
 

Mike Boyd

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Joined
Jan 18, 2002
Professional Status
Retired Appraiser
State
California
It does not HAVE to rely solely on the market approach but if the purpose of the appraisal is for financing, the lender will most likely REQUIRE that most weight be placed on the market approach. By that I mean.....say the cost approach comes in at $200,000 and the market approach comes in at $175,000, the lender will base the loan on the market approach and probably require the appraiser to change the the final value to what was found in the market approach. Because of that, most appraisers will simply use the market approach to arrive at market value.

Looking at it another way, if one is looking for the MARKET value of a property, it makes little sense to use the COST approach.

I am assuming you are writing about a single family residence. Other types of property could require more weight given to the cost or income approaches to value.
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
My parents are looking to re-fi their home, and the appraiser is only using the market value approach to obtain a valuation. The valuation appears to be on the low side for this market, since hardly a home is for sale in their upscale neighborhood. The valuation may be valid, but my question is this: should an appraiser base the appraised value of a home primarily or only on market value (apart from cost approach, etc.)?

Any insight is greatly appreciated!

- Bryan
Bryan,

Generally speaking for residential lending, lenders will lend base upon the sales comparison approach. They will not lend based upon the cost approach. In the reconciliation of the approaches used, if the cost approach is given the most weight, for example, and not the sales comparison approach, the lender will normally refuse to make the loan, especially if it is going to the secondary market.

If the sales comparison approach will not support an increase in value, bringing in the cost approach, although it may be higher in value, will not persuade the underwriter to approve the loan.

He who lends out the gold makes the rules.
 

blboyd77

Thread Starter
Freshman Member
Joined
Jan 23, 2008
Professional Status
General Public
State
Texas
Yes, it is a single family residence. Your explanation makes sense. I think my worry with it was that the compas the appraiser is using don't really seem very "like-kind", and since they are so few and far between out there (in terms of home that have been sold), that it might be skewing the value downward unfairly. Especially since home prices around here grow very steadily (no bubble to speak of in this area thus far).

Thank you for your reply, sir.
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
Yes, it is a single family residence. Your explanation makes sense. I think my worry with it was that the compas the appraiser is using don't really seem very "like-kind", and since they are so few and far between out there (in terms of home that have been sold), that it might be skewing the value downward unfairly. Especially since home prices around here grow very steadily (no bubble to speak of in this area thus far).

Thank you for your reply, sir.
FYI - lenders are gun shy making loans now days and therefore so are appraisers when it comes to aggressive valuations that exceed any guidelines.
 

ccooper

Junior Member
Joined
Mar 9, 2002
Professional Status
Certified General Appraiser
State
Missouri
blboyd,

I have experienced some very unique homes in my market in which we have had to utilize the Cost Approach as a significant value indicator. Not really a matter of apples comparing to oranges but more like grapes comparing to water melons. We have always had to back up an outside the mainstream type of valuation with extensive documentation regarding our support for our conclusions. Said documentation was concerned specifically with the historical costs and the market acceptance for a subject of this unique caliber.

You must understand the lenders perspective. A "white elephant", if foreclosed, is likely to sit on the market for a long time (years?). A scary thought to a lender.

We recently did a home of this caliber and uniqueness within the past 60 days. The historical cost of over $3M was well documented and confirmed. The highest comp sales were much lower at $1m +/-. Our subject had a $4M pending comp around the corner that fell thru. Interviews with other market professionals (high end realtors and very experienced appraisers) confirmed the general value indications of these properties. We felt very confident about our final value which had a significant weighting of the Cost Approach. It was just difficult to prove it with a lack of truly similar comparable properties.

My subject's owner is currently on his 3rd or 4th mortgage broker trying to get this beautiful round peg into a square hole (secondary market financing). The fact that we significantly considered the Cost Approach in the Final Reconciliation probably puts a large red flag on this file with anyone who reads it.

Were we wrong by considering the Cost? In our opinion no. Would another appraiser be "wrong" for only using the Sales Approach, probably not. The more unique the property, the more subjective the valuation becomes.

Please don't take this to mean that we believe Cost = Value. 95% of the time this is not the case. If the home you have in question might have many "super adequacies" in which cost does not bring an even return of value. In my market swimming pools and other extensive outdoor improvements do not justify their historical costs. Many interior items that I have seen such as expensive home entertainment, security systems or high tech green technologies have not been cost effective in my market. Others I can not speak for.

The bottom line is, if you are unhappy with your current appraisal, you might want to consult with another appraiser in your market... a second opinion. It is my opinion, that in very rare instances, the Cost Approach can be an indicator of value, but in most instances, lenders would rather see a cookie cutter subject that they know they can unload rapidly. Of course, they'll just blame it upon a worthless appraisal.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
On an appraiser forum, you are more likely to run into someone who finds merit in relying on the cost approach, then if you ask people who take risks with money for a lving. I would never risk any of my money on anyone's cost approach. Maybe it's the Golden Rule that causes me not to use the cost approach for market value when others have their money at risk. :)
 

Joker

Elite Member
Joined
May 28, 2002
Professional Status
Certified General Appraiser
State
Ohio
I agree with Mr. Santora.

Allow me to put it to you in very simple terms by asking a basic question:

If you are a buyer of a house in the neighborhood do you base your buying decision on what it might cost to build that house or what other houses in the neighborhood typically sell for?
 

Mr Rex

Elite Member
Joined
Jan 12, 2004
Professional Status
Certified Residential Appraiser
State
North Carolina
As an add on to the last 2 post. It sounds like a matter of exposure time. White elephants will only sell for top dollar after exposure far beyond what is typical for the market. If the run of the mill houses sell in 100 days on average, then the lender is looking for the price that the subject would sell for in 100 days in most cases. If to reach the "Cost" it might take 12-36 months, then obviously the "market value" is substantially less than cost, from a "market" perspective. Doesn't mean it couldn't possibly be sold for "cost", just means that the market is not there to support the equation that market value = cost, given "normal" exposure time.
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
As an add on to the last 2 post. It sounds like a matter of exposure time. White elephants will only sell for top dollar after exposure far beyond what is typical for the market. If the run of the mill houses sell in 100 days on average, then the lender is looking for the price that the subject would sell for in 100 days in most cases. If to reach the "Cost" it might take 12-36 months, then obviously the "market value" is substantially less than cost, from a "market" perspective. Doesn't mean it couldn't possibly be sold for "cost", just means that the market is not there to support the equation that market value = cost, given "normal" exposure time.

Properly done, the cost approach would acount for the white elephant factor with increased depreciation caused by functional obsolesence and the client or reader of the report would be left with an understanding of why the value of the house is less than the cost.

Maybe we shouldn't go there in this thread.
 
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