Is The Cost Approach A Real Thing?

[Raven59]

Doesn't that apply to the sales approach as well as the cost approach? Which one is going to identify functional or external obsolescence?

The property data inspector will be trained to identify and report any issues with the property (functional and external obsolescences - haha). This information will be fed into an unbiased program, which will generate fair and safe property valuations with just a touch of a button. However, if the valuation does not meet the expected number, the property data collector will be blamed for any inaccuracies and become the new scapegoat.

 

[Terrel L. Shields]

the property data collector will be blamed for any inaccuracies

Nope...if signed off by an appraiser. Perhaps if computer is creating value by AI - data collector will suffer.

 

[Raven59]

Nope...if signed off by an appraiser. Perhaps if computer is creating value by AI - data collector will suffer.

I believe the appraiser will be removed completely from the process. Remember, we are the cause of the bias.

 

[alebrewer]

Doesn't that apply to the sales approach as well as the cost approach? Which one is going to identify functional or external obsolescence?

It does. My point has been, and will remain, that without the SCA, the CA is just made up stuff (site value aside).

 

[Terrel L. Shields]

that without the SCA, the CA is just made up stuff (site value aside).

Without data all approaches are made up stuff. As the Supreme Court noted years ago, an educated guess is, at a minimum, better than no guess at all. (The plaintiff argued that since a company closed down during the depression, and no sales had occurred in the town, therefore the value of all the town property was zero and should not be taxed.) The Supreme Court nixed that assumption.

 

[Raven59]

The cost approach is closely linked to the other approaches, particularly the sales comparison approach. Land value (sales comparison), depreciation, and profit rely on sales information. The cost approach influences adjustments in the SA, and functional/external obsolescence must remain relevant between the approaches. However, certain types of residential appraisals influenced by GSE have moved the residential appraiser away from using the cost approach, leading to decreased competency among appraisers. This string indicates that many of their peers simply plug in numbers, which clearly shows the competency level. It is interesting to note that during inspections or property disputes, it is common for individuals to argue the cost of repairs or construction for an item. It is obviously part of their decision-making when buying or selling a property.

 

[David S]

In my area, since there is not too many land for sale, most cost approach just use extraction method for land value. Even for external obsolescence, we can also attribute to the land value, right? Like next freeway, power line tower or economical downturn.
IF we really use land sale comparison to get land value and building cost from contractor or Marsh Swifter book or some online resource separately, once the final result has the big gap with sale comparison, how do you guys handle that?

Did anyone get a lender / client to complain about the cost approach? One of my peer got a complaint from the realtor / buyer to say that the building cost portion is too high since the underwriter requires the insurance policy's replacement cost can not be below the appraisal report's building cost. Which brings the buyer's insurance fee high.

Another thing about GLA / site grid adjustment，of course we should use pair analysis to get that. Someone told me these range:

If a 1000 sq ft GLA house sold for $1.0 m, like $1,000 / sq ft, then GLA adjustment will be 10% ~ 30%, or $100~$300 /sq ft, like 1100 sq ft house should be sold $1.1~1.3 m assuming other characters are all the same.

If a 6000 sq ft lot house sold for $1.0 m, assume $600 K for the land and $400 for the building, like $100 / sq ft for the land, then site adjustment will be 10% ~ 20%, or $10~$20 /sq ft, like 7000 sq ft site house land portion will be $610 K~ $620 K assuming other characters are all the same.

We have several CA appraisers here, can someone confirm that? Thanks!

 

[Terrel L. Shields]

If a 1000 sq ft GLA house sold for $1.0 m, like $1,000 / sq ft, then GLA adjustment will be 10% ~ 30%, or $100~$300 /sq ft, like 1100 sq ft house should be sold $1.1~1.3 m assuming other characters are all the same.

If a 6000 sq ft lot house sold for $1.0 m, assume $600 K for the land and $400 for the building, like $100 / sq ft for the land, then site adjustment will be 10% ~ 20%, or $10~$20 /sq ft, like 7000 sq ft site house land portion will be $610 K~ $620 K assuming other characters are all the same.

WTF? That's crazy. Land is valued as if vacant and available for its HBU. It is fixed. It suffers zero functional obsolescence. Zero physical deterioration. Your adjustment should be made for GLA comparing the value of the improvements LESS THE LAND VALUE, LESS OUTBUILDINGS, LESS SITE IMPROVEMENTS.

So if you have a $1,000,000 sale where the land is $500,000 as vacant and the house is 5,000 SF, then the house contributes $100/SF. And if RCN is $200/SF the depreciation is 50%. In a 60 year TEL, the EA is 30. Use sensitivity to estimate the adjustment.

The Concept and Market Extraction of Effective Age for Residential Properties on JSTOR

Donald R. Epley, The Concept and Market Extraction of Effective Age for Residential Properties, The Journal of Real Estate Research, Vol. 5, No. 1 (Spring 1990), pp. 41-52

www.jstor.org

 

[Raven59]

IF we really use land sale comparison to get land value and building cost from contractor or Marsh Swifter book or some online resource separately, once the final result has the big gap with sale comparison, how do you guys handle that?

Did anyone get a lender / client to complain about the cost approach? One of my peer got a complaint from the realtor / buyer to say that the building cost portion is too high since the underwriter requires the insurance policy's replacement cost can not be below the appraisal report's building cost. Which brings the buyer's insurance fee high.

There's a difference between the cost of a property and what the market is willing to pay for it. This could be due to a poorly developed cost analysis, poorly chosen comparables, or a combination of physical, functional, or external obsolescence that need reconciled. It's important to note that the cost analysis is not for insurance purposes, and your report should include a disclosure stating this. The insurable value of a property is the replacement cost of the building improvements only, without including land value, depreciation, or site improvements. Developer profit is not included. If you haven't lined item those exceptions, the client will have difficulty figuring this out. If