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

[shrubberyvaluation]

Where does it say in the original post it was a new or newer home?

The title of the thread.

 

[J Grant]

Since there is no requirement to develop a cost approach and the OA gave a reasonable explanation why they did not develop it, not much support for the reviewer to intervene.
Unless developing the cost approach was a client assignment condition and the reviewer would need the order instructions/engagement letter to find that out -

 

[The Bob]

So, if he/she did develop a cost approach and it was significantly different from the SCA, should any weight be given to it? And they can vary. Back in the 2008-2010, the cost approach was almost always higher than SCA. I remember builder's arguing that we should be valuing new construction on "intrinsic value" which basically ignored market conditions at the time.

 

[glenn walker]

Move on who cares ")

 

[George Hatch]

Most peers appraising this type of property would not have blown off the CA, and most users for an appraisal of this type of property would not have blown off the CA.

Now you can check with THIS client to see what their expectations are and if it's okay with them then you can say that, but in any case the client should have spelled out their expectations to the appraiser at the outset of the assignment. If the client did ask for it but the appraiser shorted them on it then they need to fix that.

 

[George Hatch]

So, if he/she did develop a cost approach and it was significantly different from the SCA, should any weight be given to it? And they can vary. Back in the 2008-2010, the cost approach was almost always higher than SCA. I remember builder's arguing that we should be valuing new construction on "intrinsic value" which basically ignored market conditions at the time.

Its common for different approaches to value to have different outcomes, mostly due to there being different quantity/quality comparable data being available for these different approaches. That's what reconciliations are for.

IRL the SFR market is going to operate almost exclusively off the comparable sales, but as Terrell and others have noted you might be going to the CA to make certain distinctions for specific elements of the property or to add support to the quality adjustments being used in the SC.

SFR appraising is not a separate endeavor than appraising other property types; they're all related and all the fundamentals for the different approaches to value still apply if/when such conditions are present. If you were appraising a 1bd condo in Palm Springs wherein there's lots of rental data and buyers are using a GRM then you would do the same in your appraisal assignment.

 

[J Grant]

it is true appraisal peers typically develop a CA on a newer property even if not a requirement - whether reviewer wants to comment on that idk- we are reviewing the appraisal not the appraiser and we are reviewing the report that exists, not comparing it to an ideal of what we personally would have done-

 

[Surf Cat]

Now you can check with THIS client to see what their expectations are and if it's okay with them then you can say that, but in any case the client should have spelled out their expectations to the appraiser at the outset of the assignment. If the client did ask for it but the appraiser shorted them on it then they need to fix that.

I was just typing a comment on the above observation....usually the engagement letter spells out that the cost approach is required.

Kudos for the out of the box comment by the appraiser though....which I believe is generally true.

 

[Terrel L. Shields]

Was the reasoning in the statement made in the appraisal wrong?

Yes. There is typically no depreciation of a new dwelling.

From the textbooks

The cost approach is most reliable where the structure is relatively new and depreciation does not present serious complications.​

​

It is considered to be typical for new construction by our peers as demonstrated by various comments in the textbooks.
Quoting from an older copy of The Appraisal of Real Estate

"Because cost and market value are usually closely related when properties are new, the cost approach is important in estimating the market value of new or relatively new construction"​

While perhaps newer editions are more nuanced, I don't think this principle does not still apply.

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."

Since I cannot dispute his OPINION on the approaches, I would only aver that while possible to value new construction without the cost approach, it is considered to be typical and what my peers (should) do. I would not think it is a USPAP violation, but it could mean the value solely by the SA is less reliable. I would also say the idea that a property has to be sold as a rental to develop the income approach is a rather weak way of putting it. If you have a lot of rental data for similar homes, then the development of a cap rate could be made without any of the rentals "selling."

Does anyone still require cost approaches? I think FHA only requires it on manufactured housing.

​

 

[Terrel L. Shields]

Back in the 2008-2010, the cost approach was almost always higher than SCA.

That is not a flaw of the CA. Rather it is a flaw in the appraiser....sorry. There is no "intrinsic" (as someone said) reason the CA and SA should vary wildly or in any particular direction. It suggests someone has misjudged depreciation or cost. The IA - not so much.

Most peers appraising this type of property would not have blown off the CA

zackly