https://appraisersforum.com/forums/threads/usda-requires-cost-approach-for-condos.205205/page-6
https://appraisersforum.com/forums/threads/cost-approach-for-condo-unit.70277/
https://appraisersforum.com/forums/threads/condo-cost-approach.118527/page-3
https://appraisersforum.com/forums/threads/cost-approach-condominiums.154560/
https://appraisersforum.com/forums/threads/cost-approach-on-a-condominium.100721/
https://appraisersforum.com/forums/threads/condo-cost-approach.135072/page-2
Here is the verbage that LIA asked that my Mentor add to all reports:
At the request of the lender, development of the cost approach has been attempted by the appraiser as an analysis to support their opinion of the subject's market value. The cost approach was given minimal weight, if any in the final estimate of value. Use of this data, in whole or part, for other purposes is not intended by the appraiser. Nothing set forth in the appraisal should be relied upon for the purpose of determining the amount or type of insurance coverage to be placed on the subject property. The appraiser assumes no liability for and does not guarantee that any insurable value estimate inferred from this report will result in the subject property being fully insured for any loss that may be sustained. Further, the cost approach may not be a reliable indication of replacement or reproduction cost for any date other than the effective date of this appraisal due to changing costs of labor and materials and due to changing building codes, governmental regulations and requirements.
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↑
The half dozen "
chief appraisers" employed by major lenders that I have heard from really
believe inthe CA and want to see it. They seem to have a jaundiced view of appraisal reports without the CA. Is it really insurance value they're after?
They may be after both insurable and market value from the same approach. However, there is key element in your post that shouldn't be overlooked, assuming you wrote exactly what you meant.
Parts of the profession has been trying to sell the CA for market value to the public for a long time, but the public isn't buying. And who can blame them? The key point is, it is really just a certain percentage of appraisers who have drunk the Kool Aid on the cost approach. So, it makes sense to me that they wold be chief "appraisers." To me, it really raises an issue of lack of objectivity on the part of those individuals.
I think, given who the clients are, professional lenders, their decision to insure RCN is not something they can blame anyone for as long as the RCN is reasonably accurate. They get to pick the benchmarks of their own financial decisions: market value, land market value, replacement cost, etc.
*******
As you know, I just took the AI's 530 course (Advanced Sales Comparison & Cost Approach) last week. I don't know if I passed the test yet, so take my comments as being from a
yet-to-be-scored source! :laugh:
I am now convinced that the Cost Approach is very viable and extremely useful.... in answering a feasibility question, insurable value, or some other type of non-market value question. However, I am equally convinced that if a property is valued for its utility (such as a residential property) or valued for its income (commercial), then the cost approach is not useful if the question being asked is
"What is the market value?" (Effectively what Santora has been stating, if I understand him correctly). So, if a property doesn't have utility or income, then the Cost Approach may be the only thing available to opine
market value.:new_smile-l:
The instructor did make a strong case that the cost approach is useful in determining if the present value of a property is sustainable (keep in mind this is my summation of his presentation). In other words, if the cost to build something is significantly below the value the market places on it, then it is likely that the current value will not hold for long, all other things being equal. The extension of this line of thinking is that if the Cost Approach is significantly lower than market value, it provides a lender/investor/etc. an indication of what may happen in the future. So, if it costs significantly less than what the market is willing to pay, sooner or later, properties will be built to match the subject because developers will want to capture the profits to be made based on the spread... until an over-built situation is created, and then the reverse happens (no new construction because now properties are worth less than what it costs to build).
Therefore, it could be that the Cost Approach is being used as a measure of value sustainability; I'll call this a value-sustainability feasibility study. Eliminate the economic obsolescence and assuming that the cost approach is done with accurate numbers (land value, RCN, and all forms of other depreciation) and voilà- one has a number which could offer an indication if more properties will be built and, if so, possibly provide downward pressure on values. Of course, this is only part of that equation; the demand side as well as the development potential (ability to develop similar properties) is not addressed. So I have a problem that is stated like $400k + X + Y = $900k. Where my cost is $400k, my market value is $900k and there are infinite possibilities for the X (demand) and Y(actual development possibilities) values.
The trouble (IMNSHO) is that the typical residential CA is not done to the degree of accuracy (in terms of analyzing land value, cost and depreciation) to provide a credible indication of much. I think appraisers can do a reasonably acceptable job of estimating RCN (in general). That should answer the hazard insurance question. In my market, I'm usually forced to extract land values from improved sites to estimate my subject's site value- a lot of potential for errors there since I have to do a mini-cost approach on each improved comparable property. Then, the question of estimating depreciation comes up? There is a significant degree of latitude in that estimation (in most residential markets/cases).
Anyway, that's my 2-cents this Thursday morning!! :new_smile-l:
https://appraisersforum.com/forums/threads/condos-and-cost-approach.84576/
Trying to breathe life into the cost approach. :blink:
I can’t imagine why an appraiser would ever subordinate the sales comparison results for a condo unit in a market value appraisal - in order to "consider" giving weight to the cost of anything. USPAP says nothing about "considering" all approaches, but that you must develop results that are "meaningful" and "credible." How could one ever support the results of the cost approach for a condo unit as meaningful or credible? If thiese gismos sell for 100k, then that is what hey sell for.
Trying to make sense of a cost approach, one must consider that the approach has a premise – that the buyer is willing and able to endure the burdens and delays of building something from scratch, as an alternative to buying something turn-key that exists. When that premise does not hold, then the approach cannot produce meaningful or credible results.
- If buyers can’t or won’t build something new, there would be premise for “considering” the approach.
- If the appraiser’s analysis departs from the premise and contemplates the cost of a building option the buyer doesn’t have, the results are irrelevant to the buyer’s decision.
https://appraisersforum.com/forums/threads/cost-approach.80342/
https://appraisersforum.com/forums/threads/cost-approach-for-townhouse.202046/
https://appraisersforum.com/forums/threads/need-some-help-on-condo-appraisal-approaches.130507/
I guess this has been a topic for several years...
Some guy by the name of Fred seems to really dislike CA....
I couldn't tell if he dislikes it in general or just for condos...
