Is The Cost Approach A Real Thing?

[alebrewer]

that being said i do understand your desire to show how smart you is.

What's funny is that reporting a CA - when you've certified 100% of weight on the SCA - does the opposite of showing how smart you are...

 

[Tom D]

KKthen. Appraise a 2,000,000sf laboratory and pharmaceutical manufacturing facility using only the sales comparison or income approach.

ehh, i thought this was a residential thread. on non residential yous be the expert and make the big money. although, i would as a builder wonder what you expertise was in terms of segregrating the costs, or going simple with a price per sq foot. i would think that a ga takes more time to do it and charges appropriately for the reseach & knowledge. i don't think the AMC $350 fee has a construction expertise spread sheet built into the time required to do it.

 

[Terrel L. Shields]

Not in reality. Rapidly fluctuating construction costs and estimating depreciation render it totally unreliable.

Regardless short term fluctuations in prices of materials, I've never seen a building contractor who does not actually charge the going rate locally without regard to the cost except to make sure there is a margin of profit. So, despite lumber going from $1100/k to $450/k, I've yet seen a single bid that I thought was lower than it was last year or the year before. In fact, here the per SF cost is rising and has continued to rise for 3-4 years. The builder who was building for $120/SF in 2018 is now $150-180/SF and up. That's one reason we are seen more new Barndominiums being built. They are running less than $100/SF. My neighbor told me his cost less than $100/SF and he finished it about 2 months ago.

Secondly, the cost book is an excellent way to justify the cost related adjustment for unique items. It's a way to estimate the RCN of a shop or pool or other item in the analysis. The historical cost index also gives some idea of the inflation of an item or home when doing a retrospective appraisals.

The CA is not created in a vacuum. And if the RCN (not the DCN) plus land exceeds the SA then it acts as an upper level where it makes sense to the buyer to build, not buy existing housing. That does not mean the CA should always be higher than the SA. But all three approaches are based upon market data, and they are interlocking.

When I started, one mentor said he was not comfortable using only a single approach. If nothing else, if there was a huge difference in the derived value, it was useful to go back and ID why and see if you have not made a math error.

funny is that reporting a CA

Only FNMA et al limits themselves to the SA. And they have so many other parameters - hoops to jump through so to speak - that they felt the risk is worth taking. OTOH, they also demand you support each and every adjustment and again, for those oddball items - the she shed, the shop building, the horse barn, "extraction" from the market is pretty much a fairy tale of pretending to extract from the market data and just pulling a number out of your backside.

 

[J Grant]

The cost approach may be very relevant with some properties and less so in others. Same with land sales/land values.

For residential appraisals in built-up and suburban areas, where building the same house new is not an opinion, and there are few to no vacant lots or land/lot sales, it is far less relevant , and on the UAR forms, it says it was not developed unless asked for. Imo it still has some value on these appraisers, but more to find a rough land-to-value ratio and some sense of what it costs to replace a house or townhouse that size/quality. Kust says it did not rely on others for MV opinion but developed as a secondary indicator.

NEW home prices and lot sizes are not very reliable IMO - for numerous reasons - the builders often have their own crews and order supplies in bulk wholesale and thus pay less to build than it would an average person, but they charge high prices per SF to build and that is where they make profit. The lot sales are inverted in price by builders after they carve up a larger land area into subdivision lots and teh lot premiums are often absurd and may not hold value on resale.

 

[alebrewer]

Only FNMA et al limits themselves to the SA.

Ok, but that doesn't change the fact that F/F DO limit themselves to the SA...

 

[alebrewer]

KKthen. Appraise a 2,000,000sf laboratory and pharmaceutical manufacturing facility using only the sales comparison or income approach.

I'm not being argumentative - just asking for an honest response - IF you did a CA only appraisal on the above property - and I agree that the CA is probably the only approach you could use - do you really think you could come up with an accurate estimate of value for that property? Notice I didn't say 'supportable' - I said 'accurate'...

As an aside, back in the day when I taught CE, I made a punitive statement about the CA one time and was called to task by a guy that worked for the state appraising state parks and prisons. He rightly asked me how I proposed doing an SCA or income approach on either. I learned a lesson to stay in my lane. Even he said, though, that his reports - while credible - were probably nowhere near accurate...

 

[Ariba]

You truly hate me guts. LOL.

Not it all. However, there seems to be an error in your defense of the cost approach. If Fannie Mae and Freddie Mac do not accept it, then what purpose does the cost approach serve? I guess they acknowledge that the cost approach is not credible.

 

[Terrel L. Shields]

but that doesn't change the fact that F/F DO limit themselves to the SA...

with the sort of caveats they add, certainly they don't need the CA...and soon, they won't even need an appraisal either.

his reports - while credible - were probably nowhere near accurate...

Are they or are they not? Depends, doesn't it? I do valuations of mineral rights properties. So the CA isn't valid at all. And for production, everyone will rely upon the income approach. But oil prices vary daily, so then what? Accuracy is basically a one-day Freddy. Yet, it is necessary and in 20 years of doing mineral rights, I've yet to be challenged on the value. Why? Because the users understand that the value is good for that one day only and not much else.

So when are sales important? Well, if a mineral right has never been leased, nor is producing, how do you value it? You can do a huge caveat with the estimation of some future potential that may or may not come to fruition. Then estimate the value of that imaginary reserves in ground, and some estimate of the possible risk - this really isn't market value. It's an expected monetary value. So the only way is to find nearby sales of minerals and hope that translates into your property value. But these "dormant" mineral rights may sell very low but if a well is planned nearby, then the value may jump a magnitude or more, literally overnight. So how do you handle that? Well, again you support your estimate because you cannot prove it has X value in the market.

That's no different than public buildings, utilities, churches, and unique commercial properties. We got an appraisal of our church. But we were offered almost $100k more for it. Isn't the issue what is the utility of the building? The church "income" is not a factor. The church 'cost' is not a factor. And both CA and SA has to address functional and external obsolescences.

 

[Artemis Fowl]

I don't think I've ever even used the word accurate in a valuation context outside of factual items. Accurate by what measure? When we get into that realm value becomes even more fuzzy. I don't mean to sound argumentative either but generalized statements about the relevancy of a well established valuation approach because it is not the primary methodology used in the residential sector of the industry is kinda short-sighted IMO. I actually felt the same way about the Cost Approach at one time...I've since learned better.

 

[alebrewer]

Are they or are they not? Depends, doesn't it?

That's kind of my point... if you're doing a CA only appraisal, you really have no way of knowing whether you're even in the ball park or not. It's similar to throwing feces on the wall and seeing how much sticks...