Mandatory Cost Approach

[CANative]

If you have a special-use property, some would say that the cost approach is the best or only approach

That kind of supports the point I was making. No one said the cost approach has to be great or that it even has to match the other approaches. Just that it's always applicable (capable of being applied.)

My point was to "warn" appraisers not to use "no applicable" in a casual way.

 

[Gobears81]

That kind of supports the point I was making. No one said the cost approach has to be great or that it even has to match the other approaches. Just that it's always applicable (capable of being applied.)

Oh ok, that makes sense. Probably should have asked for clarification before disagreeing

 

[CANative]

For houses it's always applicable and usually returns a MV indication reasonably similar to the SA. And when it doesn't there's something rotten somewhere and by the time you figure out what's rotten you've probably solved for a lot of other questions that might have gone unanswered. I'm a fan of the cost approach. I wasn't always a fan.

 

[Timeismoney72]

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.

If you're dealing with AMC's, almost all of them require the cost approach even when it doesn't apply. I have a lengthy paragraph I include on page 3 of the 1004 that explains the approach and why it is or is not applicable. If it's not applicable I add this comment.. The Cost Approach is not applicable due to the age of the subject and the estimation of depreciation. It is provided per the clients request only. No weight is given to this approach and it should not be relied upon for any reason. Also, I charge $25 extra for "mandatory cost approach" orders on any dwelling over 5 years of age. I use the Marshall Swift estimator in the report and place the comment above in the Cost Approach section. This also applies for FHA. I don't care who wants it or why, if it is not applicable and/or could be misleading, I supply the data requested and then discount any reliability of it and express my concerns in my report. Hope that helps.

 

[Mike Kennedy]

An Approach to Value is: applicable and necessary OR applicable but not necessary. SOW issue. IF required by a client, inclusion of an approach to value is an assignment condition. One has two options accept or decline an assignment.

 

[bnmappraisal]

One has two options accept or decline an assignment.

Well said!

 

[Mr Rex]

The cost approach is not necessarily applicable and is usually the least reliable of the 3 approaches in all but new or nearly new construction. Too often the Cost Approach must be amended using SCA data to account for EI,EP and/or depreciation other than physical. As such, at best it is a bast ardized approach and as such is not necessary or applicable unless you just want to illustrate its weakness as an indicator of market value.

 

[GWISC]

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

Not always. How about a grandfathered use of a SF house in a commercially zoned area which otherwise would not allow SF? How would you do your site value (HBU; zoning would not allow SF use)? Therefore, doing a cost approach in this scenario would be misleading.

 

[CANative]

Do the improvements still contribute value?

 

[GWISC]

Do the improvements still contribute value?

If you are addressing my reply, then I would say it does not matter due to the inconsistent use with land as if vacant. I am not trying to be snarky. I mean, condos are improvements as well, but in most cases you can't do a cost approach due to the undivided interest in the land.