Interesting personal thinking from an insider...

[Carnivore]

I got this via forwarded e-mail from a source I respect. I can not wait for him to post something here, so I have left out names for privacy reasons. I can say that the person who said this is very influencial in this business. He is of similar or greater stature than Frank Gregorio. Thats pretty influential in my book. You forum old timers know what I mean.

This is personal opinion and intepretation of some areas in USPAP. I have not changed the e-mail with exception to spelling and typos.

-----------------------

<span style='color:red'>My personal opinions are...

1. The income approach is seldom applicable to residential properties in my market. Even when rental data is available, this approach almost never reflects the reason that a single-family home is being purchased.

2. I consider the cost approach a really good value indicator until a house is about ten years old. I think it is applicable, but not as accurate for homes up to 25 or 30 years old. After that, I think it has little relevance.

On a house that is 20 years old, there is certainly lots of room for debate. This is why I try not to use the labels "Complete" and "Limited". Say I am appraising a twenty year old house. Does the label really matter? What matters is that I fully disclose my scope of work, and the reasons behind my scope of work decision. This is where I think we should take USPAP.

Intended use and Intended users always matter. For example, in relocation work I do not see omission of the cost approach as departure at all. </span>
--------------------------------


Comments?

 

[jtrotta]

sounds like a personal opinion of his/her interpretation and what their thoughts are. Is it carved in stone, I think not, but it does put some credence to the theory that Bankers are involved in how USPAP is evolving.

some of the theory I've heard before, especially the cost approach issue, the income approach for single family's has little acceptance from all the input I've ever received. Perhaps this chatter will lead to a 1 page form for single family products (r i g h t ) and will shorten the finished product to 20 pages instead of 21.

just a thought :wink:

8)

 

[Mike Garrett RAA]

I disagree with both statements.

The cost approach does apply to residential properties and can be accurate provided the work is done. It is useful in establishing the upper value for the subject through the principle of substitution.

The income approach does apply to residential properties when they are used as income producing. Data is usually available; however, most appraisers don't want to take the time to develop the approach because it is time consuming.

 

[John SRA]

Jtrotta,

Just curious, what is it that you are linking to bankers? I see nothing in these comments that makes me think of bankers.

Mike,

What do you mean when you say that “The cost approach does apply to residential properties.”? If you are saying that it is almost always possible to complete a cost approach, then I agree. However, this alone does not make it applicable.

With the proper amount of research, one can estimate either the reproduction or replacement cost of virtually anything. Depreciation can also be extracted in most cases. But, what relevance does this have if it does not reflect the thinking of the market participants?

Appraisers must reflect the actions of market. People buying a home that is five to ten years old often consider building a new home as a viable alternative. In such cases, cost new is very relevant. However, in my experience, very few of the people who are buying a fifty year old house give any consideration to the cost new of the structure.

I understand the position that it can help establish the upper end of the value, but I don’t think that alone justifies the exercise.

Similar things can be said about the income approach. I can almost always find enough data to complete an income approach. However, it is a matter of public record that in my market over 95% of the single family homes are owner occupied. Given that, why would one give much consideration to a valuation method based on an investor point of view? The “typical buyer” (see definition of market value) is not considering the income stream when making the purchase decision.

In accord with the Departure Rule, omission of one of the three approaches in an assignment may, or may not, constitute departure. If the approach will not provide “meaningful results” (2003 USPAP, Lines 428-429) then the approach is not applicable and its omission is not departure.

Have a good day

JC

 

[liznindy]

I agree with Mike. Especially his comments on the Cost Approach.

 

[Verne Hebert]

Well, well, well.

I would agree that the income approach to SFR seldom yields market value. However there are times it does. Generally areas of gentrification, purchased for rental portfolios.

Now educated in Construction management, and having previously work as an estimator for some years, I am a huge advocate of the cost approach. I have heard comments, like Mike's about the upper limit of value. I am not in agreement, at all, to this statement.

The cost approach to value will yield a accurate value if:

In this order!

Inventory is stable ( high to low inventory will progressively distort the accuracy).

Land value is accurately determined

No obsolescence exists.

Physical depreciation is accurately determined.

Contributory improvements are accurately "costed".


What I have learned from the forum is, a lot our personal generalizations are "our locale dependent".

I am not going to address USPAP. I am disgusted with USPAP, and its pathetic ongoing "progress".

 

[Mike Garrett RAA]

John, you are correct in that the market approach is the most reliable method of determining the most probable sales price. A prudent appraiser should consider all approaches to value and then decide which may or may not be applicable.

The cost approach is most useful in special use or unique properties. It is also the way to determine the land to value ratio...especially in older properties, and to account for depreciation from all causes. To suggest it isn't valid is like saying AVMs can do everything an appraiser can. Poor logic.

The income approach is valid for properties producing income and valuable to the intended user of the appraisal when the income is necessary for qualifying for the loan. Being able to produce a creditable income and expense analysis is an important part of appraising and again something the AVM cannot do.

Appraisal of real estate is complex. It has taken many years to establish methods and techniques of valuing properties. We, as appraisers, should not be quick to dismiss these as unnecessary or lacking in merit. The intended user of valuations would have us out of the picture completely if the market approach was the only consideration...ie, AVMs.

 

[John SRA]

Mike,

I did not mean to suggest that either the cost approach or the income approach were invalid.

I believe in the proper application of the cost approach (and income approach) when appropriate. Few things disturb me more than looking at reports where it is obvious that the appraiser simply backed into a cost approach without doing any real research.

On the other hand, I am equally disturbed when someone attempts a cost approach or income approach in a situation where it is impossible to produce a credible result.

Appraisers should not dismiss ANY approach out of hand. On the other hand, we should not force an approach that has no meaning in the assignment. In my opinion, either is an error.

Have a good day

JC

 

[Austin]

Well, I don't have any stature at all around here and have been compared in stature to old slacker, but I agree with the man. Saying that, I never do an appraisal without considering the cost approach theory. For example, if I appraise a 30 year old house and don't find the expected rate of accrued depreciation I get suspecious. If a new on cost $100,000 and the subject doesn't come in around $75,000 in the sales approach or there abouts, then something is out of kilter. I might just do this in my head but I do it. This business is centered on maintaining the economic pecking order because without a pecking nothing means anything and the market becomes totally confused.

 

[George Hatch]

I submit the following to add to this discussion, not to detract from any of the other opinons already submitted...

Let us note:

1. The sections of USPAP that apply to real property appraisals, reviews and consulting were not developed to specifically address valuation of tract homes only. They apply to all types of properties. Despite what you may have heard at your first job, there actually are three approaches to value, and they are useful to one degree or another for all property types, even residential SFRs.

2. If USPAP or FNMA guidelines, or any other body of appraisal requirements and guidelines provided an 'out' in regards to the Cost Approach and/or the Income Approach, those exclusions would be abused to no end. Even in those circumstances where having another approach to value is helpful in estimating the value of a property. "Usually not" would end up being translated by many appraisers as "never".

3. There are lots of exceptions to the concept that either the Cost Approach and/or the Income Approach are worthless in residential appraising.

4. There is an inverse correlation between the simplicity of the appraisal assignment and the usefulness of alternative methods of estimating value. The Cost Approach and Income Approach become a lot more useful when the asignments get more complex.

5. Appraisers commonly use techniques and methods in developing and reporting appraisals that far exceed the average participants' technical abilities. The average technical competency level of the typical participant in the market should not be even a primary consideration whether or not a professional appraiser uses a method or technique. For example, how many buyers and sellers use quantifiable adjustments like appraisers do in comparing their sales data? Answer - None. Does that mean that making dollar adjustments is both unnecessary and inappropiate for residential appraising? (Austin, you need not reply to this one; everyone already knows how you feel).

6. There are times, like in those instances where truly comparable sales data is insufficient, when having an alternate indicator to value is useful both as a check and as secondary support for a Sales Comparison Analysis.

7. There are times when the Client has use for the extra information, like using the income data to underwrite debt-service coverage ratios, or using cost data for insurance purposes. Sometimes the application of the data and the methodology is useful in helping the Client to better understand the development of the Sales Comparison Approach and the appraiser's opinion of value. Context. Thus, these approaches can have value to Client that exceed the appraiser's opinion of value.

8. The decisions made by the appraiser whether or not to develop a particular approach to value should be made on a case-by-case basis, and should not be universally required nor discarded simply because they often are not as data-rich nor well supported as the typical Sales Comparison Analysis.

9. The appraiser's decision whether or not to develop one of the other approaches to value are best made in the context of proper consideration of the Scope of Work, as well as the availability of usable data. Appraiser convenience should not be a factor.

10. The technical proficiency of many appraisers to develop reasonably reliable and useful Cost and/or Income Approach indicators is wholly inadequate. Face it, many appraisers really don't understand the proper use of these tools. That doesn't mean the tools are too unreliable to use; it means the appraisers need to spend some more time understanding their use and applicability.

11. The historical patterns of residential appraising are not necessarily indicative of future patterns. In other words, what was sufficient before when 80% of our work load was 'simple' SFR work may not be enough when the majority of that 80% is gobbled up by the AVMs and all the human appraisers are left with are the more complex assignments.


IMO, we should leave it the way it is. The Cost and Income Approaches are almost never given primary weight in an SFR appraisal, and rightfully so. However, under certain circumstances they are useful and should therefore not be discarded wholesale simply out of convenience and/or ignorance.


George Hatch