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Is There A Legitimate Reason For Cost Approach?

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Ariba

Senior Member
Joined
Feb 8, 2004
Professional Status
Certified Residential Appraiser
State
Colorado
Is there a legitimate reason for Cost Approach for a cookie cutter 50-year old ranch style house in a urban setting? What is the purpose, and what do the client/lender do with the result? Is there a legitimate reason when there are plenty of recently settled, UC, and Active comparables?
 

residentialguy

Elite Member
Joined
Mar 24, 2009
Professional Status
Certified Residential Appraiser
State
Minnesota
Requirements are usually legitimate reasons to do something.
 

graindart

Junior Member
Joined
Jan 20, 2002
Professional Status
Certified Residential Appraiser
State
Montana
The one key thing you left out was: is the area fully developed?

If it is fully developed with no vacant lots available, I'd argue that the cost approach is neither necessary nor applicable. In that case, the client is probably requiring it under the notion that the more words in the report, the better the report must be. If there are no options to build (no lots available), I don't see a legitimate reason for the cost approach.

If there are still vacant lots available, the cost approach might be applicable in some instances even when the majority of SFR are 50 years old. One case would be in a neighborhood that has seen the majority of SFR being renovated / remodeled. In that case, the cost approach may be pertinent because the typical buyer may consider a completely remodeled 50 year house vs a newly constructed house in the same neighborhood area.

To answer your question about what do the client/lender do with the results........ probably nothing, as long as the value is enough to make their deal work. Of course if the value isn't what they'd like or there is a loan default, they'll go back and scrutinize everything you wrote in the report.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Is there a legitimate reason for Cost Approach for a cookie cutter 50-year old ranch style house in a urban setting? What is the purpose, and what do the client/lender do with the result? Is there a legitimate reason when there are plenty of recently settled, UC, and Active comparables?
Is this a standard request regardless of the property type, or is it sometimes requested, sometimes not?
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
The CA provides support for your land adjustment, particularly if you do it right, and supports the value conclusions of the sales approach. After all, the CA should derive the effective age from the comparable data, not simply a number PFA. Therefore, the age of the dwelling is inconsequential. The calculated age based on comparables thus should provide you a number that supports the SCA. I mean how are you deriving the age adjustments in the SCA?

In the absence of good sales data, the CA is going to be weak just like the SCA.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
Is there a legitimate reason for Cost Approach for a cookie cutter 50-year old ranch style house in a urban setting? What is the purpose, and what do the client/lender do with the result? Is there a legitimate reason when there are plenty of recently settled, UC, and Active comparables?

There was a legitimate reason prior to the collapse of the subprimes, as we saw old homes being priced above brand new similar homes.
:eek:

So it's a good indicator of short term market moves. And, when the market supports consideration of a new home as a subsititute for what exists, it can represent market value.

But not all magic math creates market value, no matter what Corelogic says it'll cost to replace.

.
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Of course there are situations where the cost approach is appropriate and needed. Thankfully, not as part of my assignments for the VA.
 

Elliott

Elite Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Oregon
I don't know if "legitimate" is a criteria appraisers use to determine to use an approach. If I'm doing a report for an AMC, it requires a CA. If I'm doing an appraisal for an estate or a individual for market value, I'm probably not going to include a CA. If an attorney asks me why I'm going to tell him about the appraisal process and the different approaches used in real estate appraising and tell him the reasons why I didn't use the CA or IA. I'm thinking most times the CA is not appropriate or supportable for a number of reasons. Its just not as appropriate or supportable as the DCA.
 

Eli

Elite Member
Joined
May 12, 2007
Professional Status
Certified General Appraiser
State
Tennessee
I love the Cost Approach. I want a current itemized cost list from Lowes or Home Depot for Christmas. I want local. REL, costs to cure, land, etc. I love the income cap approach too though.
 

Digger88

Elite Member
Joined
May 11, 2010
Professional Status
Certified Residential Appraiser
State
Virginia
insurance companies frequently use our cost approach data.
 
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