Mandatory Cost Approach

[Mr Rex]

The Cost Appraoch is the weakest leg of the 3 legged approach and must be supported by the others. The SCA was once called the market approach for a reason, it is reflective of the market and thus market value. The Cost Approch can never stand on its on except in perfectly balanced market conditions and any variance from "perfect" requires input from the SCA to reconcile the Cost Approach value. At best the Cost Approach is some other data that may or may not be relevant to market value after reconciling against the SCA. It hardly ever can stand alone, and never is the most representative of market value by the definition of market value.

Is there any well respected definition of market value that places all, some, or any value on the Cost Approach? I can believe that some Assessors place some credence in the Cost Approach, they are desperate for revenue. The market does not recognize local tax authorities desperation in the reflection of market values.

 

[Gobears81]

Is there any well respected definition of market value that places all, some, or any value on the Cost Approach? I can believe that some Assessors place some credence in the Cost Approach, they are desperate for revenue. The market does not recognize local tax authorities desperation in the reflection of market values.

This statement implies that the cost approach is squarely the high approach. That suggests to me that an incorrect degree of obsolescence is factored into the approach. There are undoubtedly overzealous assessors out there that aren't incorporating functional or external obsolescence in a manner that they should. But the premise of extracting depreciation from the market, yet the cost approach always remaining as high or higher than the SCA and ICA is flawed.

 

[CANative]

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.

There is a certain appraiser I know. We both get a good laugh when we see reports with boilerplate about how bad the CA is, how unreliable it is, how it's misleading and that "no weight was given." Yet the CA is within a few percent of the SA.

 

[Eli]

if somebody don't believe the cost approach Is worth any credence, how did you ever pass the state license examination or why did you even take the examination?

 

[Mr Rex]

This statement implies that the cost approach is squarely the high approach. That suggests to me that an incorrect degree of obsolescence is factored into the approach. There are undoubtedly overzealous assessors out there that aren't incorporating functional or external obsolescence in a manner that they should. But the premise of extracting depreciation from the market, yet the cost approach always remaining as high or higher than the SCA and ICA is flawed.

and how are you extracting this depreciation? Via the Cost Approach or the Cost Approach reconciled against the SCA? The SCA stands on its own as a mirror reflection of the market. The Cost Approach always has another approach in the picture and is not reflective of the mirror without the extra reflection.

 

[Eli]

Did everybody have to take a state examination in order to be licensed? I am not sure is the reason I ask.

 

[Mr Rex]

Sure, amd even the state board realizes the weakness of the Cost Approach. IIRC including the CA was not a requirement of the sample appraisals the state required. Why would the state board require something so clearly indicated as not required by USPAP?

 

[Eli]

Sure, amd even the state board realizes the weakness of the Cost Approach. IIRC including the CA was not a requirement of the sample appraisals the state required.

So every state required the same examinations back around 1992. I am asking because I don't know or don't remember one.

 

[Mr Rex]

Inclusion of the Cost Approach on any of the appraisals submitted to the state was not required unless required by USPAP. Has the Cost Approach ever been a requirement in USPAP? I ask because iI don't know that it ever has since I've been licensed. IIRC it was once if applicable (arguable) and later if necessary for credible results (what a joke). The Cost Approach has as much relevance to the market value of a piece of Real Estate as the MSRP of a new car has to do with the value of the new car as sold new and the next day as available used.

 

[Eli]

That would depend on how in depth the cost approach was developed.