No cost approach needed

[Mr Rex]

How do you build an old house? Old materials and old carpenters?

 

[Ross (CO)]

.....might just consider option to build (new) 'somewhere' in the market.

Not all transactions for which one might appraise involve a current PURCHASE action pending, and thus no option to build new somewhere is ever going to be consideded as any mental exercise by anyone !

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Then there is that "somewhere" matter, as in independantly attaining a vacant piece of land or buildable site, IN the neighborhood, subdivision or tightly defined market area of the mature and established area from which the subject and all selected comps are located. There may have been no fresh vacant lot sales in decades and nobody has razed any old house in recent years and build-new upon a previously improved site. Sometimes.....the land component for the purpose of throwing an estimated value at it, to satisfy a reporting form's field.....is fruitless, unproductive and not very credible.

And, yet in this thread we have read that offering a site value estimate is still necessary for the form (and Fannie) even when the cost approach is perhaps deemed NOT reliable or necessary by that appraiser (and many peers perhaps too).

Do AVM'ers and BPO'ers do the cost approach or still provide at least an estimate of the subject's site value ? Heh, it's all about the scope, and turning them around real fast and for real cheap.

 

[Functional Obs]

Since all you are doing is repeating a conclucion, while I ask abouit support, it really doesn't matter if you keep going. However, should ever develop support for that conclusion, publish it. I haven't used a cost approach for market value in about 14 years. If anyone can actually get anything out of it - not just say and repeat that there is something relevant to market value there - I'd be delighted to add it to my scope.

OK ... I didn't realize I was only repeating ... I'll make an attempt at support:

1 - Substitution - I can purchase either houses A, B, or C, inside my market area, for $320,000-$360,000. I come to find that I can build a house, brand new, same size, style, appeal, etc., for $285,000, and that I can pick up a site + current improvement, all prep costs included, for $35,000. 285 + 35 = 320 ...

Conclusion--I have an idea that maybe the houses going for $360,000 are overpriced. Hey, maybe they're not ... but I'm assuming I have good information with regard to time, permits, etc. In a case like that, I might consider building.

2 - In the same example, I find that it would cost me $425,000 to build my house (including site, costs, improvements, etc.). I might look at that $360,000 property differently.

Steven, this isn't my idea that I came up with. I'm not that smart. This is what the fine folks at the Appraisal Institute are teaching in the new certification classes. I just completed the final, 7-day, grueling class, where I saw a general guy (in the biz 6 years longer than you) not even show up for the very last day ... just could not hang.

Do I think you need a cost approach in every report? No.

I do think that it is useful when there isn't a lot of data to support your sales comparison method--in those cases I think it's very useful. Does that mean the fannie mae guy will take it? No. But I appraise to our own standards first and fannie/freddie second.

I've got a case right now where the owner bought the house in order to tear it down and put a bigger one on the lot. It's a split-foyer that's currently rented to 4 college kids. The guy is going to get a tax write-off based on the value of the house. He ordered an appraisal--the appraiser gave him a fannie mae form; cost-approach blank.

The guy told the appraiser he didn't want a loan--he already had gotten that taken care of ... (for the new house to be built, etc.), but he wanted to know the current value, and that the write-off applied to materials, etc. ...

The appraiser replied ...2 pages of excuses ... why he didn't need this. The dude spent 2 pages when he could have just written a cost approach ... except he didn't know how.

The guy further asked the appraiser his opinion of the site value, and, get this, the appraiser cited the assessor's value for his opinion....

Come on ... bs ... the appraiser doesn't know how to make a cost approach. This is a situation that screams for one ... I mean, he probably doesn't even know that there are other forms than fannie's ....

So there's my new answer, Steven. Not only does doing the cost approach provide a measure by which to compare your sales comparison approach, but doing the cost approach actually causes you to *think* about your report ... and it works well in unusual situations where the sales comparison data is either hard to come by or not the only thing that's needed.

 

[Functional Obs]

And, yet in this thread we have read that offering a site value estimate is still necessary for the form (and Fannie) even when the cost approach is perhaps deemed NOT reliable or necessary by that appraiser (and many peers perhaps too).

If it's done correctly it's reliable.

It's not something we love to do b/c it takes a lot of time. And like Steven mentioned, nobody wants to do work so that an insurance company can piggy back off it and you not get paid anything.

If I have a unique or rural property, I don't even think twice ... I make one. And if I have a new property, I make one too.

When I don't make one, I never write anything negative about the approach itself. The cost to build + acquiring the site is basically another comp.

 

[Ross (CO)]

"... and it works well in unusual situations where the sales comparison data is either hard to come by or not the only thing that's needed. "
- - - -

Rick,......Agreed, much of what you shared may well be true, and so I quote your own words.

While we're here, if you would, about this house rented out to 4 college students.....How old is the immediate neighborhood and this house, itself ? Did you notice vacant lots nearby as you were driving the streets ? How many years has it been rented-out to students ? Would that be college students who throw the occasional party ? Was there an Income Approach in that other report you saw ? Did THAT offer more help in concluding an estimated value for that property in a market environment where surely other homes are rented to students also ?.....rather than re-constructing the subject and forceably aging it. I would be inclined to consider an I.A. to be the preferred secondary support to the S.C.A. since the subject was already a rental property.

Can you explain more the owner's need to get a "tax write-off for materials" ? Sorry, I am not a landlord and never have been one. What materials ? Was there a major repair or rehab that needed to be done and the owner had not (yet) contacted any contractor and wanted the appraiser to make the quote for such work ? If this owner wanted a "current value" was the word "market" inserted between those two words and you simply forgot to include it here in your posting ? Was there a definite deficiency of closed sales of other (rented) houses in recent time in that immediate market area ?

As merely a bystander to what you mention about this other appraiser's report and minimal info about the rented house and the intended use of the report......did you have a chance to see in that report any trailing page that would represent the "order" or the letter of engagement that was the agreed framework of what the owner wanted and how the appraiser would bring together certain data and info in the process of creating their report ? Sometimes, it appears the greater elements of confusion or misunderstanding can be sourced in the launch of an assignment when things are not clearly mapped-out in the beginning.

If one could only secure clients who can explain what they really want and need, a have a fee that compliments that service and the product delivered. Maybe there were such limitations in place for this prior appraisal of the student-rental property and the client (owner) got exactly what he was willing to pay for. The mindset these days is for fast-and-cheap......and for the client to then complain later about what they received.

I too could surely benefit from a good, 7-day grueling class like the one you just completed. It just might drop-kick me out of my doldrums and give me some refreshed perspectives.

 

[Functional Obs]

"... and it works well in unusual situations where the sales comparison data is either hard to come by or not the only thing that's needed. "
- - - -

Rick,......Agreed, much of what you shared may well be true, and so I quote your own words.

While we're here, if you would, about this house...

Answers:

The neighborhood goes back to WW2. The house was built in 1950.

There are no vacant lots. There are a few "teardownable" lots (being marketed as "land for sale."

I didn't ask about the length of time of the renters, but it was vacant in 2006 when it was listed for sale (for location and lot size)--and did not sell (for 599). The renters have a lot of stuff; so they have probably been there for more than a year.

These "students" are young professionals. Do they throw a party? Sure. But I'd probably go The school they are near is the law school ... That said, the house is about as well-kept as 4 unrelated males are capable of without any maid service. The bathrooms need a visit from Mr. Clean.

No income approach was provided. Field left blank. Canned statement in Reconciliation stating that Income and Cost were considered ... however "not deemed reliable."

Just noticed the guy has a canned statement about the 5 comps ... there are only 4

Most single-family homes (btw, this is a rambler with a basement, not a split-foyer as I had stated ... no real difference in appeal though), but most SFRs in this older, desirable, good-school-district hood ... are lived in by the owners. Comparable rentals would likely include townhouses.

I haven't completed the report yet--just saw the inside last night in fact. But I will probably make an income-capitalization approach--especially considering how much data there is for the market area (if not the neighborhood).

I agree with your income-cap statement, and what the client is paying for is information that he is likely going to turn in to be reviewed by someone as qualified, and probably more qualified than me. Two of the best instructors I know work for the IRS. I do, however plan to show the cost as well. I mean ... it's what they are going to destroy.

As for the owner getting a tax writeoff, I really don't understand that part. If you come over to my house and take a look around, you will quickly realize that accounting skills haven't been my forte in life I only know what the client told me, and that's that he intends to turn this report into an accountant ... for the purpose of a tax writeoff--something about how he is able to deduct the "materials." ... He's talking about the carpet, the brick, the vinyl, the plaster, etc.

There was no major rehab done ... at least not since 1970 ... yet the house is in livable condition. If I were to move into the house, as-is, tomorrow, about all I would do is recarpet and paint. I would, of course, order a home inspection in case there were any bigger issues.

As for value ... he's going to receive, from me, "market" value. But market value can include, and benefit from, costs, and as you pointed out income capitalization.

Northern VA, and Arlington in particular, benefits from having a lot of sales to draw upon, and very well-kept records. Like I mentioned, I haven't gotten too deep into the report yet; however, I have confidence that there will be a lot of comparable sales, and I have already found some lot sales. Rentals will be available, although, single-family/detached rentals are less common here. What I have found in regard to rentals is that sqf and beds/baths are key. I realize that in other areas garages, lots, etc., weigh in more heavily ... and obviously, my first choice will be to find rentals that are sfrs .... but I am going to consider attached housing as well.

With regard to the order ... The appraisal was ordered by the same bank who ordered the new-construction appraisal.

It is about as canned as canned gets. It states there is no MLS info ... when in fact there is a ton. It states there is no functional obs. The comments section on Page 3 reads like the fine print on an attorney's letter ... basically absolving him of any incompetence ... which might come in handy in his case

He was asked, specifically by the owner, to provide a cost approach, and his response was lengthy and painful to read. He was also asked to show support for the site value, and his response was that he relied upon the tax assessor.

Basically, the guy filled out a canned form with a few extra check marks.

As for what he was told ... and this is hearsay ... the guy wanted a report to turn into his accountant. So the appraiser did the fannie form. When the appraiser was further asked to provide the cost ... he dodged.

The owner, in this case, was within his right to complain. He didn't complain about the value ... he didn't complain about the length of time it took to receive ... he complained about receiving a canned form that he doesn't know how to read.

You know this from your training ... you write your report to the level of the intended user. The intended user is supposed to understand the report. How can this happen when the appraiser doesn't even understand his own report? When the appraiser's fields are all the same as every other one of his reports ... ALL CAPITAL LETTER, DODGY, GARBAGE

As for the class ... I can't say enough good things about it. Some people think that report writing is all about making you take your two to four-hour process take three days ... it's not that at all. It's just about at least knowing how to do something. I mean, if I told you I never had any canned responses for things, I'd be lying ... but isn't it funny how all of Appraiser X's neighborhoods are near the same good schools and shopping? I mean, the street photo is nice, but can you give me a tad more? It takes 5 minutes.

-R

 

[Mike Boyd]

For $8, Marshall and Swift will do it for you on line. All you have to do is provide the essential elements of the improvements. If it's for insurance purposes, that should be all they need. If they want land value, go back in time as long as needed to get a similar sale and make a date of sale adjustment if needed. Or, make a caveat that site value not adjusted for date of sale due to lack of data to make that determination. If the assignment did not specifically ask for the cost approach, bill them the extra $8 for the M/S cost and more for YOUR time, but be reasonable.

 

[Fred]

Rick,
What can I say. It appears to me that some people have engaged in making unsupported (and unsupportable) assertions for so long, they may not realize – because even after agreeing to stop, you just keep doing it.

First, on your point about the AI, repeating someone else’s unsupported assertion is still repeating an unsupported assertion.
Second, there is your closing remark about the approach providing a check on sales comparison. Again, while I have frequently heard and read this assertion, I have yet to see anyone prove it.
Third, I’ll get the one place you put a little meat on the bones.

1 - Substitution - I can purchase either houses A, B, or C, inside my market area, for $320,000-$360,000. I come to find that I can build a house, brand new, same size, style, appeal, etc., for $285,000, and that I can pick up a site + current improvement, all prep costs included, for $35,000. 285 + 35 = 320 ..

1. Can you really just build one? The typical buyer has 285k in pocket? That’s an unsupportable assertion. It doesn’t take five minutes of demographic analysis to dig out what typical buyers have in disposable income and savings. Most of the time I have bee appraising the spread between convention and construction mortgages has been about 4-5%. That is the same amount of cash and capacity to service debt don’t leverage nearly the same amount of mortgage money. The typical buyer cannot just build one. A few buyers can.
2. Can you really just pick up a site? In plenty of suburban areas, developers build subdivisions out leaving no vacant sites. It could take a month or two to buy a site and the site could be different than subject. You just assert that they are always available in a snap. Isn’t this the type of thing one would have to establish in an appraisal to show the relevance of the method?
3. What about undue delay? How do establish that the delay or maybe a month or two to get a site, time to find an architect and settle on a plan, a month or so to get a permit, etc. does not constitute undue delay? Or do you again, just make an unfounded assumption all these inconveniences don’t exist?

Much of the above is based on what I see as an unfounded assertion (assumption) about substitution. If you read the principle it refers to a buyer and existing goods. You are taking these elements and changing them. You are change the buyer (a consumer) into a producer. You are changing existing goods and instead using a hypothetical house that will probably never be built. You just want to assert that it is a substitute and ignore all these differences.

But all that is just “theory,” because that is all you gave me to work with.

4. Even if we could wipe away all these considerations, so that the repeated assertions weren’t plainly unreasonable almost all the time, and create a perfect set of conditions for the cost approach to operate in – no one has yet published the set of methods and procedures necessary to make the method price predictive without already knowing what the comps sell for.

In closing, were it not for lenders insurance decisions, no client group would be asking for it. I am sorry, but the cost approach to market value is a lemon the appraisal profession has been trying to sell to the public for a long time, but they are just not buying it.

 

[Webbed Feet]

Rick,
What can I say. It appears to me that some people have engaged in making unsupported (and unsupportable) assertions for so long, they may not realize – because even after agreeing to stop, you just keep doing it.

<....... snip........>

But is this like a virus a person catches by replying to all those unsupportable posts? It sure seems that way..... This goes on in presidential debates too! Then we need commentators to later tell us who won, as they seem to be the only people who know.

Webbed.

 

[Functional Obs]

Rick,
What can I say. It appears to me that some people have engaged in making unsupported (and unsupportable) assertions for so long, they may not realize – because even after agreeing to stop, you just keep doing it.

Steven, you told me in your last post NOT to stop. Which is it? Stop, or don't stop?