Mandatory Cost Approach

[MikeSpool]

Just about all my clients are now requiring the Cost Approach. As we know, this is only useful for new or recent construction. Does anyone have any verbiage they use when explaining in the Reconciliation why the Cost Approach is not relevant other than "difficulty in estimating depreciation"?
Thank you.

 

[CANative]

I disagree with your premise. So I seldom try to rationalize not doing a cost approach.

 

[Gobears81]

I remember studying an MAI comp exam prep book by Ted Whitmer and it indicated that the cost approach is most relevant for new/ nearly new construction AND properties which are nearing the end of their economic lives (due to land comprising a high portion of the total value). I think of this as a scope of work issue-if you don't feel that a "standard" fee adequately covers doing the cost approach, perhaps it should be bumped up a bit. But the simple act of doing the cost approach does not mean that you have to give it any weight-the "difficulty in estimating depreciation" as you mentioned may be a valid reason for not giving it any emphasis.

 

[Mike Garrett RAA]

Not required by the VA so I quit doing them years ago.

 

[Michigander]

Running a brief cost approach on your sales can also help with estimating overall depreciation as well as provide information about the condition of those sales. Depending on where you are, site values can normally be supported, and the cost approach data if completed correctly, is usually pretty helpful. Not always, but usually. But then again I am blessed to be in an area with land sales as well as tear down quality properties so can usually come up with something.

 

[bnmappraisal]

Just about all my clients are now requiring the Cost Approach

welcome to the a m c world! (I do have a couple direct lender's also requiring this though) It seems another "selling point" for them to the lenders

(a m c: "Although not required in most cases, your bank or most others included with common sense, we will make our appraisers provide this to you at no extra cost!")

 

[bnmappraisal]

Running a brief cost approach on your sales can also help with estimating overall depreciation as well as provide information about the condition of those sales. Depending on where you are, site values can normally be supported, and the cost approach data if completed correctly, is usually pretty helpful. Not always, but usually. But then again I am blessed to be in an area with land sales as well as tear down quality properties so can usually come up with something.

I agree with you Michigander. Thankfully I am in a market with ample cost info - but land sales? That can get tricky at times!

 

[Michael S]

Just about all my clients are now requiring the Cost Approach. As we know, this is only useful for new or recent construction. Does anyone have any verbiage they use when explaining in the Reconciliation why the Cost Approach is not relevant other than "difficulty in estimating depreciation"?
Thank you.

While I too disagree with your basic premise, there are a couple of statements I typically use when describing why I didn't utilize the cost approach. Here's some samples from some recent reports (albeit commercial properties).

"In valuing the subject, only the sales comparison approach is considered applicable and has been used. This approach most closely reflects the actions of buyers and sellers of comparable properties in the market. The cost approach is not applicable in the estimation of market value due to the external obsolescence present in the market, as well as the lack of use by most market participants. The income capitalization approach is not applicable in the estimation of market value due to the lack of use by most market participants and the scarcity of comparable investment sales to determine capitalization rates. The exclusion of said approaches is not considered to compromise the credibility of the results rendered herein."

"The cost approach is not applicable in the estimation of market value due to the age of the improvements and considerable depreciation present including functional and external obsolescence. In addition market participants are not currently utilizing the cost approach to evaluate investment properties."

"The cost approach is not applicable in the estimation of market value due to its lack of use by market participants."

"The cost approach is not applicable in the estimation of market value due to several factors including: the age of the improvements, the lack of comparable land sales in Downtown XXXXXXX, and the lack of use by market participants."

 

[CANative]

The cost approach is not applicable

The cost approach is ALWAYS applicable for an improved property. It's the only approach that is always applicable.

 

[Gobears81]

The cost approach is ALWAYS applicable for an improved property. It's the only approach that is always applicable.

I don't know. If you have a special-use property, some would say that the cost approach is the best or only approach, but my basic cost approach instructor said that it is actually the worst, and I tend to appreciate that stance. A reason for omitting the sales comparison approach would be the lack of sales meeting the parameters identified by the market as suitable alternatives. Special purpose properties might have no comps, but if they have no comps and are predominantly purchased by owner occupants, how do you support depreciation and more particularly obsolescence? Obviously, I am tying the approaches together, but in valuation, the three approaches aren't typically 100% mutually exclusive.

Also, what about in cases such as leasehold interests? It could be done, sure, but are the conclusions always meaningful? Maybe this is more of a semantics thing since I am thinking about meaningful conclusions to approaches rather than applicable approaches.