Is The Cost Approach Flawed?

[Elliott]

Flawed? Ya Think? The CA is all that and a box of cracker jacks. I like to call it the "Summation Approach" since it involves so many intermediate conclusions. Best to wear a wizards robe when its being prepared. Statically it will be occasionally correct.

 

[Eli]

Flawed? Ya Think? The CA is all that and a box of cracker jacks. I like to call it the "Summation Approach" since it involves so many intermediate conclusions. Best to wear a wizards robe when its being prepared. Statically it will be occasionally correct.

No, it’s good. It takes a bunch of time. It is kind of like looking at listings. Listings many times will tell you what a property is not worth. For several years I did all three approaches on all commercial property. Trust me the cost approach is a good indicator. Very good.

It is good on residential. I use depreciated cost on many adjustments in residential. Getting a handle on that land value as if vacant and effective age is good.

 

[Michigan CG]

Deriving adjustments using the cost approach is a lot more supportable than the supposed millions of matched pairs that people magically discover..............that never existed.

 

[Terrel L. Shields]

Market extracted depreciation is accurate. USPAP doesn't require you to address EP, Functional, External obsolescence, only accrued. Epeley's work describes the technique.

 

[Meandering]

Market extracted depreciation is accurate. USPAP doesn't require you to address EP, Functional, External obsolescence, only accrued. Epeley's work describes the technique.

That's true,
But,

when you finished with the bottom line number, what does it represent??? Not "market value", because no potential buyer can buy your imaginary new home with imaginary depreciation. All "the market" can do is buy a new house and the depreciation is left up to the buyer's imagination. There is no "market evidence" of anyone paying a discounted sale price for a new home based on imaginary depreciation, and, there is no market evidence of any builder selling a new home at a discounted price base on imaginary depreciation that did not yet happen, but would make the new house similar to what exists.

The bottom line is that "the market" can either buy a new house or an already existing older home. If you want to say new homes similar in size and quality cost $X to build or buy, and older homes cost $Y to buy, with the % difference being attributable to oh, depreciation, or maybe in the opposite direction, mature landscaping, fine, but the market can't buy any of those millions of appraiser imagined "replacements" that are being slid in to the analysis as a substitute for what exists, when many times no substituent exists in reality.

Nobody says I'm gonna buy a used car with 50k miles on it, but I'm gonna research what the newest model of that car costs and then compare the two to extract the depreciation of the older car, and that will help me make a decision on whether to buy the new car or the older car. Nope, people buy what they can afford, and they buy the best value for the dollar they can afford to spend. That's market value.

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[TRESinc]

Nobody says I'm gonna buy a used car with 50k miles on it, but I'm gonna research what the newest model of that car costs and then compare the two to extract the depreciation of the older car, and that will help me make a decision on whether to buy the new car or the older car. Nope, people buy what they can afford, and they buy the best value for the dollar they can afford to spend. That's market value.

i can afford to buy a lincoln to drive around for work but i chose not too. the amenities, build quality and value of a lincoln is greater than that of the nissan sentra i drive for work. so much for that theory.

 

[Terrel L. Shields]

Not "market value", because no potential buyer

wrong. All depend on "market data" and income and costs as well as accrued depreciation thus is "market value".

 

[ucbruin]

I'm sure this will come as no surprise to most....
Yes I believe it is flawed as I believe most if not all of RESIDENTIAL appraising has some type of flaw. Minor, major....
Why else is appraising considered an ART and not a SCIENCE????

If I remember correctly, I seem to recall hearing a rumor/gossip that the powers that be were considering eliminating the CA section on the updated 1004 form back in 2005...

On a typical RESIDENTIAL appraisal (although it is quite apparent from GH's poll, there is no such thing as typical), what does the CA really add to the Sales Comparison Approach???

 

[Terrel L. Shields]

what does the CA really add to the Sales Comparison Approach???

It tells you when a market is overheating. If the CA costs are $110/SF, and the land is $20/SF GLA, before depreciation, but sales are $150/SF GLA, then EP is fairly high, but if $200/SF, it is excessive. Excessive profits invites ruinous competition.

 

[Eli]

Cost approach usually sets the upper limit. Difference between New construction and existing construction. Why do you think FNMA wants a sale in a competing subdivision on new construction?

Good rule.

FHA and VA like the rule. FHA and VA probably made the rule.