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Help Me Make The Argument

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Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Help me make the argument that the cost approach is not a valid indicator of value on residential structures in excess of 50 years old based on "reproduction costs" (per the URAR 1004) and in fact could be misleading. Consider construction materials & techniques, current building codes, lack of land sales vs. abstraction method, etc...
I appraise so many older structures (thank god for the 2055) that I am considering NOT developing the cost approach as I feel it is so irrelevant, not necessary, AND not applicable on these older structures. Lets here your addendum comments.
 

Karl

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Arizona
I agree totally Used to do 150+ year old homes & they'd ask for a cost approach. Told em my oldest Sears Catalog was 30 years. Had the opportunity to do a few Sears Roebuck homes so use to use the sears cost breakdown on on older homes, never once was questioned . Anyone else done a Sears Roebuck home? One underwriter asked if I'd put some numbers in the boxes on top page 2 "Cause everyone else did"
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
The Cost Approach on a 100 year old Victorian is so out of kilter that it's rediculous. I will comment that due to the extreme differences in design, construction styles and methods, materials, and functional differences, any use of the Cost Approach other than a site estimate would be misleading. And I leave it at that.

ROger
 

Wally Jones

Senior Member
Joined
Jan 23, 2002
Professional Status
Certified Residential Appraiser
State
Florida
I'll usually develop a cost approach for older homes (because invariably the UW will ask for it if I don't) but add the following comment in the Final Reconciliation:

"Most weight has been given to the Sales Comparison Approach. Limited consideration was given to the Cost Approach due to the difficulty in valuing depreciation of homes the age of the subject property. The Income Approach has been considered and is deemed not applicable. "
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
I agree with Wally. You can do a cost approach on anything, it may not be a reliable indicator of value but you can do it. If you do one just dis-claim it. The information is there for reproduction costs if you look hard enough. The secret is in estimating the economic life and remaining economic life.

Now lets see....I am not going to do the cost approach...because it might be misleading. I am not going to do the income approach because of a lack of data. Hmmmmm, why not say, "I am only going to do the market data approach and only use one comp because three is too many and might confuse the "intended user".
 

Tim The Enchanter

Elite Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
NOT developing the cost approach as I feel it is so irrelevant, not necessary, AND not applicable on these older structures.

And "not used by the typical buyer in this area and price range." :D
Income approach same thing.

2055 does not even have to be a limited appraisal anymore. It can be a complete summary,
excluding consideration of the above approaches. Assuming those exclusions apply.

But I digress into memories of a recent day spent on USPAP.
A less boring / more interesting class than I had guessed. Maybe it was the instructor. :p
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
Frederick,
I think the statement that the cost approach adds nothing to the reliability of market prices as value indicators stands on its own. I don't think anyone can disprove the statement.

There is a study by Dotzour of 330 relo appraisals that matches the anticipated sales prices with the actual sales prices. One of the findings of the study is that the accuracy of the cost approach did not vary with the age of the subject. Dotzour does not draw any inference from that, but I think it shows that backing-in to depreciation is just as easy with any age property. That is, if it cost $500K to reproduce propertie that have market prices around $400K, the depreciation is $100K regardless of its age.
 

jtrotta

Senior Member
Joined
Jan 16, 2002
have always laid the greater weight on the market approach and noted it in the final reconciliation and similarily spoken of the income approach that we did not use.

the cost approach on older dwellings should be done, but with the facts in mind that the materials today may not be as good a quality as those of the past. look closely at older wood flooring (tight) and todays (space between each and almost every board ?); plaster walls & ceilings, how many have you viewed that have minimal cracks or none at all ? very little settlement ? understructure better than today's ? - probably the cost to actually reproduce these types of dwellings would be well above today's costs for today's dwellings. Recently we replaced our Roof and some portions of underlayment (25 yr.old); yet I have done recent housing that exceeds 50 years in age and they still have most of the original materials, perhaps it was the better quality products produced at the time.

How many plasterer's can you find in your area :question:

over the past 10-15 years, IMHO products being produced today are geared on less useful life to keep business's flowing and constant design changes allow for a shorter life span.


Just a thought er two

:ph34r:
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
I borrowed this from an appraiser friend who runs into quite a few gentrified structures in the metro area:

The Sales Comparison Approach is emphasized in the final value correlation because it best reflects typical buyer/seller preferences and actions in the marketplace.

The Cost Approach is not emphasized due to the actual age of the subject property. The Cost Approach is not perinent in appraising older homes due to the difficulties in estimating total physical depreciation and the resulting economic life of the property. The Cost Approach also overlooks potential forms of functional obsolesence in older homes when deriving estimated replacement costs due to the availability of modern building materials and construction techniques.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Backing into the numbers is different in the cost approach and in the sales approach how?

9 of 10 appraisers don't used paired sales to estimate the SF adjustment, they just use a number they are comfortable with. I know one that has used $20/SF since 1992. Might go $30 on a new house.

Ditto for garages....did you ever really do paired sales and NOT come up with something like 4000, 3500, 10,000, -5000, 2500, 4500...) for say, garages or fireplace adjustments?

Fact is, many appraisers use cost related adjustments without understanding that they are even doing it. Costs can be extracted from the marketplace, but did you ever see an appraisal where the Sales Approach was relied upon without reference to the Cost approach?

I appraised a property that the owner had built a new barn. Cheap. I asked how cheap. $8000. I had a copy of a driveby from another appraiser.....they were adjusting the barn at $45,000.....about what the house was worth. Without some sense of COST the driveby appraiser made an enormous error.

Also, while fannie mae forms may say REPRODUCTION they actually teach that you use REPLACEMENT costs.

You can look at a dwelling and make a JUDGMENT about how much per SF that house will contribute to the site (sales approach). And you can make a JUDGMENT about what is its remaining life and effective age and figure out how much the house will contribute to the site (Cost App.)

One of the findings of the study is that the accuracy of the cost approach did not vary with the age of the subject.
and shouldn't vary anymore than the Sales Approach.

I run a running spreadsheet called 'how am I doing" where I match my appraised values for poultry farms (with a heavy emphasis on the Cost Approach) with sales prices (only on properties that were not for sale when I appraised them.) I make a 3% per year time adjust to the appraised value up to 10% and compare the results. My average deviation is under 5%. My worst was about 22%.

Jtrotta said
look closely at older wood flooring (tight)
Older houses of poor quality are already gone, so only the best have survived. But today's modern house likely will "last" just as long with better preservative materials and people simply have more money to maintain a house. Poverty in the 30's ruined a many a home that would still be standing.
 
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