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Drive By Cost approach.

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wayne forbes

Thread Starter
Freshman Member
Joined
Dec 6, 2005
Professional Status
Certified Residential Appraiser
State
Florida
Lender is requesting a Cost approach on a 2055 ext. inpsection. (We all know what the purpose is). I cannot see how this is possible if quality of interior features cannot be determined. He says if it wasnt possible, why is the approach on the form? I have seen where clients have ordered a 2055 with sketch and interior photos, trying to save money when the form says Exterior Inspection. #4 of Limiting Conditions states that value is based on Sales comparison method although Cost and Income was considered but not used unless otherwise stated. What are your feelings on this matter? When would the Cost approach method be used on a Drive By?
 

leelansford

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Mar 29, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
Wayne, I have communicated, perhaps, 2-3 appraisals using the 3/05 form 2055. On none of these have I developed and communicated the CA because, at the least, I did not consider the CA to be necessary in order to communicate a credible appraisal.

If you search here in the Forum, you will find probably several different strings of discussion specific to your question.

I'll bottom-line this for you: IF the condition of the assignment requires you to develop and communicate the CA, you have two options:
1) Accept the assignment
2) Decline the assignment

And, from the ASB "USPAP Q&A", April 2006:

"Question:
I have a client requesting that the cost approach be included in every appraisal assignment, including those where I feel the cost approach may not yield meaningful results. I am concerned that by complying with the client's request I may be providing a misleading appraisal report. How can I comply with USPAP and satisfy the client at the same time?

Response:
Performing a cost approach that may not yield a meaningful indication of value does not result in a misleading appraisal report IF (fyi: my cap's for emphasis!) the appraiser properly addresses the applicability and suitability of the approach in the report. Many appraisers address this in the reconciliation by including statements such as, 'The cost aproach was included solely at the request of the client; it has been given no weight in arriving at the final opinion of value because...' "

Lee
 
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hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Lender is requesting a Cost approach on a 2055 ext. inpsection..... He says if it wasnt possible, why is the approach on the form?
I could probably do a much more credible cost approach on a 2055 if the subject was new construction, the construction hadn't started yet, and I had the plans & specs vs. doing a 1004 on an existing home.

The ASB has addressed providing a low credibility analysis for a client (I forget which FAQ it was?). As applied to doing the cost approach on the 1004 when the subject is 50+ years old and there are no available land sales, the "gist" of the Answer was (according to me) this:
An appraiser can include an analysis (such as the cost approach) if the client requests even if the appraiser determines is not sufficiently credible to be reliable. The appraiser must state that in his/her opinion, the analysis does is not sufficiently credible to be relied on for valuation purposes, and should state therefore it was not relied upon in the final value reconciliation.

I can't remember if this was specifically noted in the ASB's response or not, but if not, then I (again, this is me) interpret this to mean:
OK, if the appraiser has the ability to do the analysis, and when complete, determines it is not sufficiently credible to be relied upon, then the appraiser can finish it if the client requests it, but state all the disclaimers that it was not used in the value reconciliation. However, if the appraiser determines there is not enough data (ability) to do the analysis, then it cannot be done.

This is my interpretation. And, it makes sense in a USPAP/SOW/Client engagement way.
If the client requests the cost approach as part of the assignment and I agree to accept the assignment, and once I do the cost approach I then determine the results are not reliable, I can include it in the report and not consider its results in my value reconciliation. I must advise the client this is the case.
I cannot do a cost approach if I don't have required data to do so (like interior condition, materials, etc.). I can't use made-up data, and then say the results are not credible even if I don't consider it in my value reconciliation.

In the first example, I have the ability to do the cost approach and then judge its results: Credible or not credible. There is nothing misleading about this.
In the second example, I do not have the ability to do the cost approach because I do not have sufficient data to do it. I can't judge the credibility of the results because I don't have what is necessary to conclude a result.

To me, this makes perfect USPAP sense! :Eyecrazy:
 

wayne forbes

Thread Starter
Freshman Member
Joined
Dec 6, 2005
Professional Status
Certified Residential Appraiser
State
Florida
Thank you for your responses. I can understand that an appraiser my write paragraghs after paragraphs to disclaim the reliability of an approach used, however, how can the approach be used in the first place if there is not enough info. Of course this requirement is usually requested after the fact, however, how can one provide an approach and then say it is not reliable and was only provided due to the request of the lender when enough info to provide an accurate result of the approach was not available in the first place?
 

wayne forbes

Thread Starter
Freshman Member
Joined
Dec 6, 2005
Professional Status
Certified Residential Appraiser
State
Florida
Good responses. Has anyone done a Fannie Mae course or could determine why this approach was included in the form( Even though saying it is not required). Is it just because they can, or do they know something I dont?
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
When would the Cost approach method be used on a Drive By?
when you are drunk? It'd help maybe.

Well, first I wouldn't do it, period. but if otherwise had to...I would ask the client to fill out a form detailing the quality and quantity of the building...I.e.- let the client fill it out and sign and certify that it was a true and correct rendering of the property. Then caveat the report with a extraordinary assumption that the detail provided is true and correct...
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Certified Residential Appraiser
State
California
It's on the form in case it is necessary for credible assignment results.

Also in case the lender needs it for the insurance guy.
 

Ross (CO)

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
wayne,..........The old.....beat the appraiser with a rubber hose trick.....and the C.A. is the rubber hose. Interesting that your second sentence is placed in parentheses......(We all know what the purpose is).

Do we ? Do you ? Did your client tell you why they posed this request.....after-the-fact ? Does that mean.....after you submitted your initial report without an included C.A. ? Why now press this client to explain to you WHY they are making the request ?....... albeit late and after you have (probably already) determined that it was not necessary nor very reliable to support your credible opinion of current market value !

Let me guess.....they posed this to you with a phone call only, yes ? You initially referred to the "quality" of interior features. Good point. So too would be relative condition of those features. Did you have any recent and supporting MLS records on your subject property to which you could refer or have other persons (list or sell agents) to contact so as to get that information ? How old is this subject property ? Is it in an equally mature neighborhood or market area ? Have there been any sales of vacant lots in recent time to give focus to land/site value ? Have there been any homes sold which were then soon razed.....and rebuilt recently with a new home, and re-sold ?

If you find that it could be possible that any certain client will spring such requests on you after you send a report.......then find a way to bring up that possibility at the start and before you have launched any such assignment. This might become an impasse which disables agreement to be forged between you and the client, and surely their ability to honestly say WHY they would REQUIRE a C.A........when 9 of 10 of your local peers would say to NOT (have to) do one, and especially when the client knows NOTHING about the subject property to JUSTIFY why you WOULD need a C.A. to support a value opinion which you have NOT even concluded yet !

Of course, not doing their C.A. after-the-fact can become their reason to create a problem with your eventual compensation for that report.....because you may not have "done as instructed". It's a tricky and sensitive marketplace we work in these days. The appraiser must take control whenever those certain situations might arise. of course......a C.A. on a 2055 "Drive-By" is simply another classic example of nutty clientosis.
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Certified Residential Appraiser
State
California
FTR, I don't see how an appraiser can have his cake and eat it too. You can't get out of the CA by stating you have no idea about the quality, type and condition of interior or other unobserved features because How can you have done the SA without that knowledge?
 
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