No consideration for Cost Approach on a one month old property.

[Tom4value]

I was completing a review of an appraisal on a multi-million dollar home. Under the final reconciliation comments, the appraiser stated; "The Sales Comparison Approach is the only approach to value used in this report. The Cost Approach is not used, since buyers in this market typically don't rely on depreciated cost to make buying decisions and the Income Approach is not used due to a lack of recent sales of comparable properties that were rented when sold." I can completely understand not considering the Income Approach in this case, based on the lack of market data of two-plus million-dollar, single-family rents in the market. But the comments regarding the justification for not considering the Cost Approach was a new one for me. The Cost Approach to Value section was completely blank. To add additional contacts, the appraisal was completed for refinancing on a property that had just been finished being built one month prior to the effective date of this appraisal report. I've seen some unique comments over the years, surrounding not considering the Cost Approach to Value. But this is a new one for me, especially on a custom-built home that was only one month old at that time.

What you have is a lazy-bass appraiser! I can tell in his/her comments.

1. For the income approach, “lack of recent sales” is not a valid reason. I go back to when I was doing my primary education. My proctor brought up the standard verbiage at the time; “due to the difficulty in finding rental comparables, the income approach is not developed.” He said, “tough nuggie! You are being paid to develop it!” The appraiser is to determine if the market would consider the income approach. If not, state that. “Lack of recent sales” does not state that.

2. A one month old, multi-million dollar home shouts out 2 things. 1. land and improvements value are major determinants of value and 2. You probably had less than “cookie cutter” sales comps. A buyer would definitely take the cost approach into consideration. The cost approach would not just applicable but a major support for the sales comparison approach.

I hope you put this appraiser through the wringer.

 

[Terrel L. Shields]

buyer would definitely take the cost approach into consideration

Often you see buyers go into the "used" home market because they found out how much it would cost to build on a lot they buy... And as the classic books say, "Cost represents a ceiling. A prudent buyer is not going to pay more than it costs to build on land they buy".... even when you consider the time value of money and allow for it.

 

[sputnam]

What you have is a lazy-bass appraiser! I can tell in his/her comments.

1. For the income approach, “lack of recent sales” is not a valid reason. I go back to when I was doing my primary education. My proctor brought up the standard verbiage at the time; “due to the difficulty in finding rental comparables, the income approach is not developed.” He said, “tough nuggie! You are being paid to develop it!” The appraiser is to determine if the market would consider the income approach. If not, state that. “Lack of recent sales” does not state that.

2. A one month old, multi-million dollar home shouts out 2 things. 1. land and improvements value are major determinants of value and 2. You probably had less than “cookie cutter” sales comps. A buyer would definitely take the cost approach into consideration. The cost approach would not just applicable but a major support for the sales comparison approach.

I hope you put this appraiser through the wringer.

I agree. USPAP provides two valid reasons for omitting an approach. 1- Not applicable. Like the Cost Approach for an individual condominium. and, 2- Not necessary for credible assignment results. That it's too hard due to a sparsity of data or because the Client didn't require an approach are not a valid reasons. Lazy appraiser is right. I'd ad, and unprofessional. The Income Approach nonsense is BS. I've often reviewed reports where the appraiser said 'insufficient data'... and then, reviewed another report for a property in the same neighborhood where the appraiser miraculously found data.... because the Client required the Income Approach.

 

[J Grant]

I agree. USPAP provides two valid reasons for omitting an approach. 1- Not applicable. Like the Cost Approach for an individual condominium. and, 2- Not necessary for credible assignment results. That it's too hard due to a sparsity of data or because the Client didn't require an approach are not a valid reasons. Lazy appraiser is right. I'd ad, and unprofessional. The Income Approach nonsense is BS. I've often reviewed reports where the appraiser said 'insufficient data'... and then, reviewed another report for a property in the same neighborhood where the appraiser miraculously found data.... because the Client required the Income Approach.

In a review capacity, we do not pass judgement on the appraiser using words such as lazy or unprofessional. We are reviewing the appraisal, not the appraiser.
Client not requiring an approach is a valid reason, as long as the appraiser believed that when omitting the approach the value opinion is still credibly supported. ( appraiser comments on why omitting the cost approach the appraisal still has credible support for the value opinion from the SCA).

I personally prepare a cost approach on nearly every appraisal and especially will on a newer home, When I am reviewing, my job is to analyze the appraisal I am reading, my job as reviewer is not based on comparing their appraisal to whether I would do it differently or if I think the appraiser was being lazy.

 

[J Grant]

I was simply trying to understand the original appraiser's justification behind their comments, that the Cost Approach is not used, since buyer in this market typically don't rely on depreciated costs to make buying decisions. What depreciation is there for a one-month-old property? In this market segment (new, multi-million dollar, custom-built homes) one could argue, that the typical Buyers in this market segment would consider the cost of building their own home when considering making an offer on a pre-existing home.

Though I personally develop a cost approach on most appraisals, it is more for my own benefit ( a land value estimate etc) and for client having the same - but I also, having sold RE for 5 plus years, I happen to agree with the OA' comment that the typical buyer for a completed home is often not considering building thier own/concerned with depreciated cost. Though buyers may have a rough idea of building costs, a buyer who elects to construct a new home is in for a lengthy process of headaches and unable to move in for however long it takes to build the house, get the CO.

A buyer also has to pay cash or put down major cash to build new, whereas buying a finished house, they can get financing and put low $ down . This is why we often see new homes built on spec by a contractor/investor, then sold as a new but finished home to the owner occupant buyer, and (typically) fewer houses contracted to build from ground up by an owner occupant borrower-

 

[CGinMN]

I was simply trying to understand the original appraiser's justification behind their comments, that the Cost Approach is not used, since buyer in this market typically don't rely on depreciated costs to make buying decisions. What depreciation is there for a one-month-old property?

Many appraisers, including here in this thread, forget about functional depreciation and external depreciation, who do impact new construction, especially in the high-end custom segment.

 

[alebrewer]

Wouldn't it make sense to want to know if the same house can be built for less than the subject?

As an appraiser I certainly would want to know.

Well, you're making a lot of assumptions there, Mark. (1) you're assuming your cost figures are accurate - what if they're not? (2) you're assuming there is no trade off for having to wait 6 months to a year for a home to be built. And even if your assumptions are true, how does that make the report less credible if the appraiser decides to not develop the CA? IOW - how does it affect your SCA opinions and conclusions?

 

[alebrewer]

Here's a question: In all honesty - how many times have you gone back and revised an SCA because your CA was not in line? IOW - when the two approaches are not in line, is your first suspicion that you missed something in the CA, or that you missed something in the SCA? My first thought when they're not in line: something smells fishy in CA-town.

 

[Mark K]

Here's a question: In all honesty - how many times have you gone back and revised an SCA because your CA was not in line?

You reconcile and weight the two approaches. MOST of the time the numbers have come in within a reasonable margin of error and you can use the CA for support for the SCA.

IMO, its no different than using some BS boilerplate language to try to explain why an appraiser decided that - although he considered the Income Approach for a fourplex appraisal, it was not developed because its not necessary for credible results. H&ll, I can come up with a perfectly credible appraised value for a fourplex using only the SCA, why should I bother with the IA?

 

[alebrewer]

You reconcile and weight the two approaches. MOST of the time the numbers have come in within a reasonable margin of error and you can use the CA for support for the SCA.

IMO, its no different than using some BS boilerplate language to try to explain why an appraiser decided that - although he considered the Income Approach for a fourplex appraisal, it was not developed because its not necessary for credible results. H&ll, I can come up with a perfectly credible appraised value for a fourplex using only the SCA, why should I bother with the IA?

If you're reporting on the 1004, you're certifying that you developed your opinion of value on the sales comparison approach to value (Cert #4). If you're reporting on the 1025, you're certifying that you developed your opinion of value on the sales comparison and income approaches to value. So - if you're reporting on one of those forms, you're bound to your certification. Doing a narrative, or reporting on the AI or GPAR forms gives you more leeway for weighting the approaches.