Mandatory Cost Approach

[hastalavista]

When I review, I regularly read reports that tell me how unreliable/worthless/non-credible the cost approach is for a myriad of reasons... and then the cost approach value indication is within $5k on a $2,000,000 house.
I wonder why the report even bothers to do the SCA? Who needs it when the CA comes in with 1% time and time again.

 

[Terrel L. Shields]

I wonder why the report even bothers to do the SCA? Who needs it when the CA comes in with 1% time and time again.

I'm that good so I will suggest it to my next client

 

[Mr Rex]

The biggest error that appraisers make in developing the CA to MV is trying to force a value that matches the SA.

Why certainly the CA can be matched to the SCA given EI,EP or EO. At least thats what the PROponents would have you believe.

 

[Gobears81]

When I review, I regularly read reports that tell me how unreliable/worthless/non-credible the cost approach is for a myriad of reasons... and then the cost approach value indication is within $5k on a $2,000,000 house.
I wonder why the report even bothers to do the SCA? Who needs it when the CA comes in with 1% time and time again.

Hey, stranger things have happened. I have had cases where all three approaches are within a percentage point or two of each other. It certainly isn't common, but it is a nice feeling when it happens because your confidence in that value is that much higher.

 

[Gregory Beck]

I do them but state no weight is given for value with the cost approach and is being done as a courtesy to the lender

 

[Mike Garrett RAA]

The biggest problem with the cost approach is most appraisers don't do it properly. Perhaps we should asked ourselves..."why isn't it a requirement for FHA or VA for existing residential properties?".

 

[Terrel L. Shields]

Hey, stranger things have happened. I have had cases where all three approaches are within a percentage point or two of each other. It certainly isn't common, but it is a nice feeling when it happens because your confidence in that value is that much higher.

That is a real advantage of the multi- approach methods. The "tighter" that spread the more reliable the report (or any individual approach) is going to be.

The three methods were never meant to be three disparate methods of arriving at truly independent values. They rely upon ALL the market data, including income data, cost data, and sales data. Our analysis of all three has to be consistent and logical to have any meaning. As for the CA being "worthless", think about those 3 comp sales grids where the three sales may have from three to five or more "adjustments" EACH...I would argue that a good cost approach can beat that as far as "accuracy" by its very nature. And virtually all the sales grids I see from residential appraisers either ignore land value (that fundamental value that should represent the value "as if vacant and available for its highest and best use") or make somewhat meaningless adjustments between virtually identical lots...and even in the assessor's office, it is glaringly obvious that they value residential property virtually on the basis of a ratio between land and improvements. Two identical lots with one having a single wide mobile home and a well built stick home, which lot is given the most value? The stick house. Why? The lots are identical. The "difference" relates to the inappropriate vs. appropriate improvement for the lot - HBU issue - and that should be addressed within the functional obsolescence created by the inappropriate improvement, not a creature of the land.

 

[hastalavista]

I just finished the cost approach on a property in my market.
This was for an insurance valuation (retrospective- last year). This house is in a rural-like area (by that, I mean it has well and septic, and the houses are on 1.5 - 10-acres).

I did the cost approach first. I had three decent land sales. The subject was heavily damaged, so I had to make some assumptions on the condition, but I felt relatively good with the modified age-life depreciation estimate. There wasn't a lot of site improvements (patio with cover, the well and the septic). I used AppraiserBase costing service (they are zip-code specific) and I ran Builders-cost.net as a back-up (I went with AppraiserBase as they had the better selection and customization of the components); but the two estimates were within 5% of each other.
I concluded the indicated value by cost approach.

Then I did the sales comparison approach; I was able to speak to at least one of the brokers involved in the transaction (this is a niche market and the guys/gals who work this know it inside & out) so I had excellent confirmation. There were really only four sales to consider, and I ended up using three of them in my analysis. Those sales ranged in value from $1,150k to $1,500k and were spread over 18-months. There were significant differences in GLA and condition, as well as outbuilding amenities.

The difference between the two approaches was 4%.
This was a case where the two approaches really were independent. So, my point is that the cost approach is a lot more reliable than many of us may think, and even though I gave the SCA most consideration in the reconciliation, the CA (IMO) certainly provided support for the conclusion.

 

[Mike Garrett RAA]

No, a cost approach is not a requirement of USPAP. I think I said this already in this thread..."the problem with a cost approach is that most appraisers don't do it correctly!". It can be a valuable tool and, in some cases, the only way to effectively value a property.

Years ago we had an appraiser who was chair of the Board of Appraisers (Colorado) provide a 4 hour CE seminar on the Cost Approach. We also had a representative of Marshall/Swift give us a 4 hour CE seminar on Cost Approach. Our local officers, instructors, and FHA/VA appraisers have given seminars on the cost approach. The consensus was/is "most appraisers were not sufficiently trained in the cost approach in the basic licensing education. Also, most just backed into a cost approach when doing a form appraisal report. Further, it was being developed just to satisfy the lender's requirement for a site value and an estimate for insurance purposes".

The Appraisal Institute (AI) discouraged it's residential members from doing cost approaches a number of years ago because most did not produce credible results. My brother, who is an SRA and long time appraisal instructor for the University of Colorado, was an opponent of the cost approach in residential mortgage appraising. When I taught the basic 40 hour new licencee course and USPAP, I also cautioned that the cost approach for residential appraisal was a "weak link" and subject to additional scrutiny by the state investigators. A former investigator for the state told me she could almost always find fault with the cost approach in a residential appraisal form report.

So, that said, why do one? The only answer is..."because it was necessary to provide a credible appraisal".
Thankfully, the VA does not require one.

 

[CANative]

If the MV indication from the CA is significantly MORE than the indications from the SA what might it being telling you (or the reader?)

If the MV indication from the CA is significantly LESS than the indications from the SA what might it be telling you?

If the land to improvement ratio is significantly HIGH or LOW what might that be saying?