Is The Cost Approach Flawed?

[Howard Klahr]

I might give it more credit if it more closely mimicked the real world development of the cost approach as performed the folks that actually rely on it, the contractors that actually build stuff. As is, the "appraiser" cost approach does not mimic the typical market participant buyer and more importantly does come close to how contractors develop the "real" cost approach.

These statements seem to contradict each other.

the Cost Approach as performed by most appraisers is a exercise/study model at best.

Isn't this an issue with the practitioner and NOT the technique? You could make this same statement about any methodology used regardless of the approach.

 

[Mr Rex]

These statements seem to contradict each other.


Isn't this an issue with the practitioner and NOT the technique? You could make this same statement about any methodology used regardless of the approach.

Yes, the second sentence should have said does not come close...

 

[glenn walker]

Very location and market area specific - We have very few areas where the cost approach is similar to the sales comparison approach-- 1,500 Sq.Ft. Homes built in 1935-1955 selling for $1,000,000 plus located on 4,000 Sq.Ft. lots and no lot or land sales in the last 50 years. It's rare anyone does a full tear down they apply for a remodel permit - tear down 3 walls and essentially build a new home but without purchasing a build-able lot ( there are none) In summary 95% of appraisers around here cannot really complete a real cost approach that is truly supportable but Mc-Mac Appraisal school will teach you the class for $75.00 LOL

 

[Joe Flacco]

Leaving one wall sounds like a lot sale to me. They probably do that because they can avoid certain fees or maybe because footprint is nonconforming. Basically new construction. Just likely exploiting some loopholes.

 

[TRESinc]

Leaving one wall sounds like a lot sale to me. They probably do that because they can avoid certain fees or maybe because footprint is nonconforming. Basically new construction. Just likely exploiting some loopholes.

similar thing happened with a friend of mine. he lives along the lake and there was an old boathouse, in pretty poor condition, built when the house was new in the 50s. he wanted a new one but due to restrictions from the army corp of engineers he was not allowed to build a new boathouse. the solution was to remove everything but the foundation of the old one, right down to the slab, and rebuild it as he wanted. so long as the foundation size/shape stayed the same it was allowed. he now has a 2 story boathouse

 

[Michigan CG]

Leaving one wall sounds like a lot sale to me. They probably do that because they can avoid certain fees or maybe because footprint is nonconforming. Basically new construction. Just likely exploiting some loopholes.

I was hired years back for a lawsuit where a lakefront property was being built. The lot was no longer conforming to zoning and if it was destroyed the land had to remain vacant. What people do is tear down three walls and build the "new" house and then tear down the 4th wall when the other three are complete.

 

[Joe Flacco]

I was hired years back for a lawsuit where a lakefront property was being built. The lot was no longer conforming to zoning and if it was destroyed the land had to remain vacant. What people do is tear down three walls and build the "new" house and then tear down the 4th wall when the other three are complete.

That is interesting. I don't think I have ever seen that before. I saw one guy keep a few bricks from the original house and it looked like it resulted in lower property taxes compared to if it was actual new construction.

 

[Howard Klahr]

he now has a 2 story boathouse

How does the boat get to the second floor?? lol

In summary 95% of appraisers around here cannot really complete a real cost approach that is truly supportable

Once again, the issue is NOT a failure of the methodology but the practitioner. Just because an area is built-up and there are no land sales, land still has value. There are methods and techniques to perform that analysis.

, the second sentence should have said does not come close...

I have performed quite a few feasibility analysis reports, pre-construction appraisals and have worked with many developers and investors. The cost analysis use in my reports comports very well with that of many industry participants so I don't understand where is the issue.

 

[TRESinc]

How does the boat get to the second floor?? lol

floods

 

[Terrel L. Shields]

tear down 3 walls and essentially build a new home

Scarcity...under-estimating the land contribution- happens a lot when nearby vacant land sales are absent. The lot value is key.