Is The Cost Approach A Real Thing?

[Ariba]

Not saying it is crap. It usually supports the value. In rare cases, if I could, I would put the most weight on the cost approach. They will not let me.

OH, they wouldn't let you. Are you not the appraiser? Should you not be providing the most credible appraisal report?
"It usually supports value" Yes, after you manipulated the crap out of it.

 

[RCA]

The Income Approach is underused - and you should attempt to use to contain probably useful rent information - which for example let's you know whether the rent will cover the mortgage, in case the owner has to move and has rent as an option to selling.

 

[Terrel L. Shields]

That's correct. And on the deed it says $10 plus OVC.

Only family transactions are exempt from deed stamps.

 

[Terrel L. Shields]

e were taught to make the sales and cost approach to match or to be slightly above the sales approach.

Wow...bad instructors.

 

[NC Appraising]

OH, they wouldn't let you. Are you not the appraiser? Should you not be providing the most credible appraisal report?
"It usually supports value" Yes, after you manipulated the crap out of it.

You truly hate me guts. LOL.

They wouldn't let you. Duh.....Yeah, I am going to battle this one out with fannie and freddie...becuase Im the appraiser. Get real.

4. I developed my opinion of the market value of the real property that is the subject of this report based on the sales comparison approach to value. I have adequate comparable market data to develop a reliable sales comparison approach for this appraisal assignment. I further certify that I considered the cost and income approaches to value but did not develop them, unless otherwise indicated in this report.

I declined the assignment. I responded: I do not have adequate comparable market data to develop a reliable sales comparison approach for this appraisal assignment. The lender thought I was nuts as they always have that super appraiser on call...fine, let them get sent to the board.

Usually supports the value. As I said in my previous post: in tract home developments and under normal housing (supply/demand in equilibrium) conditions, yes, the cost approach usually supported the sales approach. Right now, heck no. It is low by 10-20%.

 

[NC Appraising]

Wow...bad instructors.

I actually had a very good instructor.

My mentor on the other hand..... check the middle boxes, appraised value near the predominate, adjust right up to the 15% net and 25% gross, etc. Yeah, I was trained by a large skippy mill firm. FWIW, after I got certified, he got busted by FHA and went out of business.


Does anyone know why this was? Do not exceed the 15% net, 25% gross. Did the loan get denied, fannie freddie would charge a higher fee...avoid future buybacks..it had to start for a reason?

I understand the predominate, as this is still a thing with AMCs and lenders. Stupid as heck. I see appraisers still doing this...like every home in every area is the same or near the predominate? Yeah right. I can see if the appraised value was higher than the high or lower than the low....

 

[Functional Obs]

Can someone try and explain the cost approach? I am a trainee and just submitted my work samples to BREA for review (5 samples?!), and I do not really understand the cost approach enough to be asked about it. More often than not there are zero land sale in the same zip code as my subject let alone a comparable lot. I have spoken with a few appraisers and it seems like they just make up some information and throw it into the cost approach section. Is there a comment that appraisers are putting into the text addendum that explains what is going on or are we all just hoping that the state does not get a copy of the report? Am I supposed to break down every aspect of the dwelling from the cost of 2 by 4s to the cost of the tile grout or is there an "easy" way to arrive at a cost per square foot in my market area?

Please Help!

My mentor used to refer to the cost approach as "the sticks and the bricks." It's simple in theory:

Cost = Materials (new) + Land - Estimated Depreciation.

The cost of the materials brand new is easy enough to research. You need to know the size and quality of the subject (and its other features, like garages, decks, etc.). You'll need a cost service. These days, I use Dwelling Cost.

You can find the land value in a few ways. A sales comparison of land is a good method for that. In Northern Virginia and DC, many of the markets don't have any vacant land available, but sometimes, there are sales of distressed/tear-down houses.

And subtracting out depreciation is pretty easy since most forms have the Age-Life formula built in. You can get fancy with estimating depreciation later.

The best way to learn about the cost approach is to do them on appraisals where the cost doesn't matter as much. Do them for practice and get comfortable.

 

[Tom D]

For me it has nothing to do with whether or not clients require it - although if you're reporting on the 1004, you're certifying you put 100% of your weight on the SCA, so developing and reporting the CA is just increasing the work exposed to scrutiny. That said, the reason I have, for most of my career, found the CA to lack credibility is that it is too easy to manipulate. There are too many moving parts - local multipliers, straight line depreciation (which doesn't exist), estimating TEL and EA, contributory value of site improvements, estimating entrepreneurial incentive. I know folks will say all of those items are 'market derived' but - IMO - that's just being milk toast about it.

keep that truth in that appraisal closet. the reality is that very long ago areas where there might not be a MLS and not a lot of available date, some r.e. college professor came out with the idea of using the cost approach, or the income approach, to come up with a support to your lack of good comps. today, there is too much sales data to prove your value. doing the income approach and/or the cost approach when you got a sufficient sales approach is a waste of you non paid time doing it. and as said above, another bear trap with your foot in it for the state to painfully close it.
that being said i do understand your desire to show how smart you is. it's a business decision, just like working for an AMC. more work for same pay is not my business model.

 

[Essexfenwick]

Not in reality. Rapidly fluctuating construction costs and estimating depreciation render it totally unreliable. Maybe if you took a week off and commissioned blue prints / specs and interviewed 10 builders with the specs and blueprints then took the average estimate with the house being new or nearly new you could develop something interesting.

 

[Artemis Fowl]

keep that truth in that appraisal closet. the reality is that very long ago areas where there might not be a MLS and not a lot of available date, some r.e. college professor came out with the idea of using the cost approach, or the income approach, to come up with a support to your lack of good comps. today, there is too much sales data to prove your value. doing the income approach and/or the cost approach when you got a sufficient sales approach is a waste of you non paid time doing it. and as said above, another bear trap with your foot in it for the state to painfully close it.
that being said i do understand your desire to show how smart you is. it's a business decision, just like working for an AMC. more work for same pay is not my business model.

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