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Help Me Make The Argument

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John Wilson

Junior Member
Joined
May 1, 2003
Professional Status
Certified Residential Appraiser
State
Illinois
Originally posted by Terrel L. Shields@Jun 17 2003, 08:18 AM
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?

Good point.

But the market, and sales prices overall are driven by buyers who are asking "how much would it cost to add a fireplace?" How much would it "cost" to add another garage?" "How much would it cost to build that 750sft deck?"

Seeing cost related adjustments shouldn't be a big supprise. Or should it? ;)
 

Mike Simpson

Senior Member
Joined
Jan 30, 2002
For an older home with minimal updating; the cost approach provides limited effectiveness due to the degree of difficulty estimating accrued depreciation and entrepreneurial profit.

Now, try and explain that to an underwriter who's used to seeing the cost approach. They took an appraisal course somewhere in time and now know more than you. It might be worth completing the cost approach and giving it minimal consideration in the final reconciliation for the afore mentioned reasons.

-Mike
 

Richard Carlsen

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
Mike

You assume that there is "entrepreneurial profit" in the sale of an older house. Why? Cannot the market simply purchase an older house to live in?

And since when is the degree of difficulty in doing an approach to value a justification for not doing it? I'm working on a property with 4 houses and 5 additional building on 10 acres and 466 feet of lake frontage as we speak. Just because comps are hard to find and the grid is hard to fill in making the whole process difficult does not mean that I am relieved of the obligation to do the sale data approach.
 

Mike Simpson

Senior Member
Joined
Jan 30, 2002
Richard-

My comment is taken directly from the latest addition of 'The Appraisal of Real Estate'--the appraiser's bible.

I wish I had more time to discuss this topic in detail, but I don't...darn Forum addiction!

-Mike
 

Blue1

Elite Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
California
Here's a scary thought.......I just finished 2 assignments on Victorian homes. You know, the ones with the peaked roofs, traditional wood siding, wood deck style porches, large double hung wood windows near the floor, "shotgun" style room layouts, dormers upstiars, 'gingerbread' accents, the whole nine yards.

Here's the "kicker"......

Both these homes were less than 10 years old and built to replicate older homes.....seems it's a trend in some parts here. Upon first inspection I could've sworn that the windows were old wood double hung. Even had the typical paint layering, etc. Upon closer inspection, they were dual pane and the frames were vinyl!! Floors were wood laminate made to replicate the old plank flooring. and on....and on.....and on.

Maybe I did it wrong, but I used similar Victorian sales (built in the late 1800's) for comps. I developed the Cost Approach but stated it was not really reliable due to the design/appeal of the home and the disparity in building materials, etc.

What a nightmare!!! :eyecrazy:
 

USPAP Compliant

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
That would be like having a "kit car" that LOOKS like a Cobra.


In the classic car circles, we call that "a clone". You take an old classic and and paint it and intall the proper tim to make it look like a real muscle car.

1964 Cutlass with a 6 cylinder engine.....bit it LOOKS like an Olds 442. The "clone" will not usually approach 25% of the value of the real thing.
 

Blue1

Elite Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
California
Bob,

I see your point. That being said, homes built in the late 1800's are seldom found (in my area) in original condition. Mostly, the homes infrastructure (electrical, plumbing, foundation, interior walls, etc.) will have been completely replaced over the years. Even the windows may have been completely replaced/upgraded with 'look alikes.' It then becomes very difficult (if not impossible) to quantify the extent and care of the restoration process of a particular comparable property.

However, I appreciate your comments and appreciate your perspective. It will help me if I ever get a similar assignment again.
 

Ben Vukicevich SRA

Senior Member
Joined
Feb 9, 2002
Professional Status
Certified General Appraiser
State
New Jersey
OK Bob I,

Let's forget about this silly thread and get into serious stuff..and you can't answer my question...cause you know the answer. We'll let the Ford man, Frank G come up with an answer...

What does 442 stand for???

Hey FranK G, did you see the new 2005 Ford GT?? The one they used to race at LeMans. They're going to build 1000 for 2005 at a price of $140,000 to $150,000.. cost new-that's so no one can say I'm not staying on the topic of cost. :D :D and complain to Wayne.

Possible new avatar for you????

Ben
 
Joined
Jan 16, 2002
I got into this thread late and tried to read all of them quickly....but here's my additional 2 cents worth...nobody mentioned the problem with profit margins (of buiders).
I can't get it to work here becasue of a huge greed factor. Land is high, but even using real land values
price per sf for dwelling at $105 per sf (for average quality frame) still dosn't meet market prices. Correct me if I'm wrong but M&S assumes a relatively low profit margin.
 

Verne Hebert

Senior Member
Joined
Feb 25, 2002
Professional Status
Certified General Appraiser
State
Montana
You guys know I am BIG on the cost approach to value!

But to answer your post simply (God knows we love simple): Having completed a significant number of historic homes, ...the greatest significance the cost approach to value generates in homes of +- to 50 years plus, is the realization of the "superadequacy" of quality of construction (when the reproduction cost is used), and the market's reaction to the maintenance thereof." This is evidenced in the disparity of the market and cost approaches-this disparity is functional (superadequacy of quality of construction) and/or external. Hence without this final manipulation to the cost approach (physical depreciation only considered), the cost approach will always be considerably higher than the developed market approach.

So, yea!

Unless you really want to know how much more the reproduction is going to cost than a like GLA tract home, why do it? We all know no buyers wants the additional maintenance.
 
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