No cost approach needed

[Fred]

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

Niether. I didn't tell you what to do. I said, "it doesn't matter." Repeated an unsupported (or unsupportable conclusion) doesn't make it any more true or credible. So, "it doesn't matter" if they are repeated.

I am sorry, perhaps I am making a mistake applying the same standards we apply to everything else to the cost approach - namely collect data and analyze before reaching a conclusion, as opposed to starting out with a conclusion. For example, if an appraiser said a certain type of house in a given neighborhood seels for a certain range of prices. Wouldn't we expect the appraiser to be able to produce a sales analysis? If I were going to make a statement about what options are available to typical buyers, it would be the results of an analysis, not a pre-determined conclusion.

 

[Functional Obs]

Niether. I didn't tell you what to do. I said, "it doesn't matter." Repeated an unsupported (or unsupportable conclusion) doesn't make it any more true or credible. So, "it doesn't matter" if they are repeated.

I am sorry, perhaps I am making a mistake applying the same standards we apply to everything else to the cost approach - namely collect data and analyze before reaching a conclusion, as opposed to starting out with a conclusion. For example, if an appraiser said a certain type of house in a given neighborhood seels for a certain range of prices. Wouldn't we expect the appraiser to be able to produce a sales analysis? If I were going to make a statement about what options are available to typical buyers, it would be the results of an analysis, not a pre-determined conclusion.

Alrighty ... well, at the end of the day, I suspect we agree that we don't agree.

I am going to continue to use a cost (and income) method when it is necessary, and you are going to continue to call the excersise a waste of time ... or doing someone (insurance, etc.) else's job.

The guy who started this whole thread off, though ... ought to be advised that at least learning how to do a cost approach is a good idea. Why? So he can pass his cert class if nothing else ... but more so he can, after knowing how to develop one ... decide for himself he thinks it's a waste of time.

My mentor btw thinks it's a waste of time too--and as such, I was never taught how to construct the approach correctly--not until I took the two classes (Cost from McKissock, and Adv Rept Writing from AI).

I took the first course in Armstrong County in PA ... where there aren't a lot of sales. I actually laughed when I saw the MLS there ... 6 Comps in 2 years for the property we were looking at ... 2 of the comps manufactured housing. Those guys there consider more than sales comparison. Those residents there can buy up all the lots they can eat ... for cheap.

I feel better that your issue is with the concept as a whole and not just me.

 

[Fred]

I feel better that your issue is with the concept as a whole and not just me.

Of course it's not with you. You are just an internet personna who could be posting under an alias. It is most definitly the concepts. It's more what I might call "appraisal reflexes." I hear conclusions based on fishy-sounding assumptions and I challenge the assumptions. I hear conclusions that would have to result from market study and I ask about the market study. Most of us do the same thing, for example, if a reviewer says your value is wrong, you ask for the market analysis that led to that conclusion. I just find when you make the same inquiries about the cost approach, it is surrounded by some sort of defensive shield of dogma that resists all normal inquiry.

Alrighty ... well, at the end of the day, I suspect we agree that we don't agree.

I may have a lot of trouble making myslelf clear, but "agree" and "don't agree" is not the issue. If an appraiser states a conclusion, and that conlcuison is false, I don't really have an oppurtunity to "agree" or "disagree." I focused on one statement, that the build option is available to the "typical" buyer. I have looked into that a few times in the last 15 years. From what I have found, and it should be obvious that this is what would be found, it is a stretch to think that even 10% of home buyers can afford the option. Then there are the physical and legal limitations. I think 2-3% is more is more accurate than 10, and that is still before subtracting for physical limitations, legal limitations, those who just wouldn't do it, and undue delay.

My mentor btw thinks it's a waste of time too--and as such, I was never taught how to construct the approach correctly--not until I took the two classes (Cost from McKissock, and Adv Rept Writing from AI).

Interesting. Just consider my above comment about false statements, and consider the question of how one can "correctly" construct an approach based on a fase premise (other than a necessary hypothetical condition).

FWIW, I have invested considerable time into studying the cost approach. In the 90's, I put together a library of texts going back to the 1800's trying to find the source of all this. I have tried to collect every journal article on the subject. I have published an article on the subject. Also, I took that same McKissock couse (and have the PDF) and the AI course for commercial property within the last three years, and I took the AI "advanced" cost approach class (520? or something like that) way back when.

If there is a "correctly" done cost approach for market value, that is news to me. As far as I can tell, there are some willing to make the assertion that there is a "correctly" done cost approach for market value, but no one has ever published it. And I am not holding my breath.

As to the McKissock course and the "correctly" done cost approach, I recally that course said that "extraction" was a "good" method for finding vacant land value when there is no vacant land. I dont' want to digress too much, but there's another one of those unsupported and unsupportable assertions. I wonder what are some of the "bad" and "just average" methods, and what study was undertaken to determine extractions is "good." But the main point is - getting back to (unsupportable) assertion about the build option being available to the typical buyer - if you have to do extraction or allocation to fabricate a land value, then the build option probably doesn't exist for the typical buyer.

Getting back to the OP and your view that "insurance" is not your business. Then you have a problem if you want to do mortgage appraisals. The clients think replacement cost for insurance is your business and that is why they are asking you to do it. In a way, whether you are an appraiser who thinks the cost approach is relevant to market value 100% of the time, 50% of the time, or 0% of the time - you still have an obligation to identify the client's use correctly and match the scope of work to that. If you read the excerpt from Fannie on how to do that, they are telling you exactly what they require to be insured by the lender.

 

[Gary Schinagel]

Why is the cost approach included in the report even originally? To estimate site value. The feds want to lend on a restricted land to improvements value ratio which is typically 30-35% for homogeneous track homes. If its way off that they need to know why and if its common(which can be the case for subdivisions with larger and or more expensive sites). Thats why they eliminated the requirement for some lending purposes but still required the site value to be estimated within the report for most assignments. They again were almost unanimous about wanting to get rid of it completely but again it ONLY remained due to the desire for the Lenders to at least estimate the site value. I personally think it an important component especially for and as compared to new construction when typical buyers regardless of the comment would weigh it at least as rationale to buying a new home( I say that because I see even the best new subdivisions have declining resale values when they are originally built because the builder is competing with them till the subdivision sells out). Dont tell me Grandma will pay more for a used chicken coop than a new one. But for most instances it is obsolete because it shows incureable obsolesence due to the depreciated value amount that becomes unrecoverable or incureable which is typically calculated at 1% per year roughly for effective age. THATS WHY THE COST SECTION IS SO SMALL AND NOT REQUIRED NOW BY HUD. But To me its still a good ceiling indicator from the infinite number we start with and most always shows value compared to new. Underwriting insurance standard will NOT use our cost approach which we calculate using the sq ft method within the report. The most accurate methods for Costs are Quantative and Unit in Place with replacement and reproduction seperate issues again. You sometimes have to adjust marshal swift to excellent rating for standard homes in some areas like Santa Fe where the price per Sq ft is high. Basically manipulating the slide rule. Extraction analysis IS often times extremely accurate though. Take any homogeneous area which is mostly developed but has vacant land still available if the asking price for the land is more than 30% of the median house sold in the area. You better have an explanation. We can discuss the cost approach forever but the feds simply do not care as much about it. ITS THE VERIFIABLE SITE VALUE ESTIMATE THAT IS IMPORTANT TO THEM. They really dont want to be in the land business they want to lend on homesites not rural small farms that should be handled via Farmers home administration.

 

[Functional Obs]

Of course it's not with you. You are just an internet personna who could be posting under an alias.

I wish sometimes that were the case (and after all, there is a country star out there singing, "I'm so much cooler online!") .... but my personna has the exact same name as I do

You remind me a bit of a regular at my local Irish bar. This is a compliment btw--the guy is very smart. The big talk the other night was about that Serb leader getting caught. From there the conversation shifted to the prisoners at Guantanamo Bay and then on to the ex president of Iran. As you can tell, we are quite the intellectual bunch, able to solve all the world's problems, after a few pints of stout. Anyway ... I made a comment about the Iranian's point of view on something and the regular, very excitedly demanded, "Do you speak Farci?! Do you speak Farci?! ... Then how do you KNOW what he said?!"

Hmm ... I had to concede that there is merit for things you can directly see or touch (or hear) vs. stuff you have to rely upon assumptions for.

As for the "correctly" comment ... what I meant there was that my mentor used to, when pushed by whoever to provide the cost, take the following steps:
a - Take the value, divide by 3, and make that the site value
b - Plug numbers into the SQF above and below until they came out to somewhere near the current value
c - Write a statement that he based his info on some grand study involving depreciation of materials.
d - sign it and ship it

By correctly I meant go through the steps (either extraction, or sales comp--for land, or even builder interviews ...

 

[Fred]

Why is the cost approach included in the report even originally? To estimate site value. The feds want to lend on a restricted land to improvements value ratio which is typically 30-35% for homogeneous track homes.

There is something to that. There used to be a lending theory that the more value was tied up in land, the more risky the property. That may be changing. I am not sure who "the feds" are, but the federal bank regulatory agencies have no requirement for separate site value in their guidelines. Fannie and Freddie dropped it. I have no idea about FHA or VA. Also, some use five acres or less as a cutoff for dividing residential mortgages into risk pools.

I would say that neither site value, nor replacement cost "belong" to the cost approach. You can include them in an assignment any time you want. However, that may not be clear to clients who are accustomed to finding this information in a certain section.

By correctly I meant go through the steps (either extraction, or sales comp--for land, or even builder interviews ...

I see. I am just not sure having better data is a difference-maker if you base something on unsound theory and inappropriate assumptions.

You remind me a bit of a regular at my local Irish bar. This is a compliment btw

Thanks, but I should warn you, I don't exactly "blend" in at Irish pubs (if a bar is the same thing a pub used to be).

 

[Gary Schinagel]

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

Whats the problem with learning a springboard of principals to apply? Making sure you continue to learn and refine them, so you point is taken Rick? Tips and points are only a small antidote to the experience of being self taught and reliant. Heck we all got to pick up a old reveered reference book now and then. With learning though you have to start somewhere these springboards of knowledge are the beginning of the search. Cost approach usefullness to me is not going to change just because you are better at it because it just does not matter much. We hopefully are all supplementing our Marshal Swift and NADA with real interviews. BUT IT REALLY IS ONLY SO IMPORTANT.
The usefuleness of the cost approach to me diminishes with the age of the subject.
You better have a good explanation for attempting the site value.
Its typically represents the market ceiling for values as compared to REO.
Rate your subject on a one to 10 scale pick your comps and whalla.
Thats when the appraisal just went from an infinite to number andthats when the work just BEGINS.
Man I love that cost approach kinda helps me spread the report out so I can get to processing but it doesnt make the file any thinner. Play close attention to your new construction projects and it is almost seemlessly dead on. Winging it I mean!

 

[Ross (CO)]

(per Gary S.)-----"Why is the cost approach included in the report even originally? To estimate site value. The feds want to lend on a restricted land to improvements value ratio which is typically 30-35% for homogeneous track homes. If its way off that they need to know why and if its common(which can be the case for subdivisions with larger and or more expensive sites). Thats why they eliminated the requirement for some lending purposes but still required the site value to be estimated within the report for most assignments. They again were almost unanimous about wanting to get rid of it completely but again it ONLY remained due to the desire for the Lenders to at least estimate the site value. I personally think it an important component especially for and as compared to new construction when typical buyers regardless of the comment would weigh it at least as rationale to buying a new home( I say that because I see even the best new subdivisions have declining resale values when they are originally built because the builder is competing with them till the subdivision sells out). Dont tell me Grandma will pay more for a used chicken coop than a new one. But for most instances it is obsolete because it shows incureable obsolesence due to the depreciated value amount that becomes unrecoverable or incureable which is typically calculated at 1% per year roughly for effective age. THATS WHY THE COST SECTION IS SO SMALL AND NOT REQUIRED NOW BY HUD. But To me its still a good ceiling indicator from the infinite number we start with and most always shows value compared to new. Underwriting insurance standard will NOT use our cost approach which we calculate using the sq ft method within the report. The most accurate methods for Costs are Quantative and Unit in Place with replacement and reproduction seperate issues again. You sometimes have to adjust marshal swift to excellent rating for standard homes in some areas like Santa Fe where the price per Sq ft is high. Basically manipulating the slide rule. Extraction analysis IS often times extremely accurate though. Take any homogeneous area which is mostly developed but has vacant land still available if the asking price for the land is more than 30% of the median house sold in the area. You better have an explanation. We can discuss the cost approach forever but the feds simply do not care as much about it. ITS THE VERIFIABLE SITE VALUE ESTIMATE THAT IS IMPORTANT TO THEM. They really dont want to be in the land business they want to lend on homesites not rural small farms that should be handled via Farmers home administration."

- - - - -

Well, I hope your clients are paying you handsomely for what could likely be a voluminous addendum to your reports ! ......and then the overwhelming weight guiding one's reconciliation will hang heavily of the grid analysis from comparing closed sales ! Go figure.

Now, about this part of ...."...NOT REQUIRED NOW BY HUD", are you actually referring to the thing about still having to offer a site value estimate even when the C.A. is not performed ? If so, might YOU have the dated text reference that was asked for earlier in this posting thread ?

As you say....."ITS THE VERIFIABLE SITE VALUE ESTIMATE THAT IS IMPORTANT TO THEM", one could perhaps fully agree. One secures actual closed sales of truly vacant lots INSIDE the stated boundaries of the market area containing the subject and ALL selected comparable sales.....and reconciles a credible value estimate relating similarities and differences with the SUBJECT's site. One may NOT throw a strong chain around a vacant lot sale from ANOTHER market area outside of that from which one's report was developed and hook that chain to a heavy-duty pick-up truck and HAUL that lot sale back over the line into the subject's market. That.......would be misleading. Markets differ, and land value can differ. It's not necessarily a $/sq.ft. thing for land valuation too. Aestetics and appeal are quite dominant in "pricing" land......and don't foget that "builder's lot premium" thing. They have mastered a fine art of sucking a buyer's wallet dry with elaborate explanations of why some of their sites are "worth" so much more. maybe we have to learn their techniques and apply that to our site valuation process too.

Sometimes, there are NO recent vacant lot sales (recorded and/or accessible in public datbases) within the subject's immediate market area and within the regular course-of-business (i.e. agreed and paid-for S.o.W.). Sorry, Mr. Client, why don't you AND your borrower simply contact the insurance company mentioned by him and communicate with their agent to provide the insurance value necessary to satisfy all parties and take this loan transaction further toward completion. Maybe the agent will have to visit the property too. They also should SEE the home on which the policy will be written. You could subtract their insurance value from my market value and that might tell you a site value.....from YOUR calculations. Great, very well, then.

 

[Gary Schinagel]

(per Gary S.)-----"Why is the cost approach included in the report even originally? To estimate site value. The feds want to lend on a restricted land to improvements value ratio which is typically 30-35% for homogeneous track homes. If its way off that they need to know why and if its common(which can be the case for subdivisions with larger and or more expensive sites). Thats why they eliminated the requirement for some lending purposes but still required the site value to be estimated within the report for most assignments. They again were almost unanimous about wanting to get rid of it completely but again it ONLY remained due to the desire for the Lenders to at least estimate the site value. I personally think it an important component especially for and as compared to new construction when typical buyers regardless of the comment would weigh it at least as rationale to buying a new home( I say that because I see even the best new subdivisions have declining resale values when they are originally built because the builder is competing with them till the subdivision sells out). Dont tell me Grandma will pay more for a used chicken coop than a new one. But for most instances it is obsolete because it shows incureable obsolesence due to the depreciated value amount that becomes unrecoverable or incureable which is typically calculated at 1% per year roughly for effective age. THATS WHY THE COST SECTION IS SO SMALL AND NOT REQUIRED NOW BY HUD. But To me its still a good ceiling indicator from the infinite number we start with and most always shows value compared to new. Underwriting insurance standard will NOT use our cost approach which we calculate using the sq ft method within the report. The most accurate methods for Costs are Quantative and Unit in Place with replacement and reproduction seperate issues again. You sometimes have to adjust marshal swift to excellent rating for standard homes in some areas like Santa Fe where the price per Sq ft is high. Basically manipulating the slide rule. Extraction analysis IS often times extremely accurate though. Take any homogeneous area which is mostly developed but has vacant land still available if the asking price for the land is more than 30% of the median house sold in the area. You better have an explanation. We can discuss the cost approach forever but the feds simply do not care as much about it. ITS THE VERIFIABLE SITE VALUE ESTIMATE THAT IS IMPORTANT TO THEM. They really dont want to be in the land business they want to lend on homesites not rural small farms that should be handled via Farmers home administration."

- - - - -

Well, I hope your clients are paying you handsomely for what could likely be a voluminous addendum to your reports ! ......and then the overwhelming weight guiding one's reconciliation will hang heavily of the grid analysis from comparing closed sales ! Go figure.

Now, about this part of ...."...NOT REQUIRED NOW BY HUD", are you actually referring to the thing about still having to offer a site value estimate even when the C.A. is not performed ? If so, might YOU have the dated text reference that was asked for earlier in this posting thread ?

As you say....."ITS THE VERIFIABLE SITE VALUE ESTIMATE THAT IS IMPORTANT TO THEM", one could perhaps fully agree. One secures actual closed sales of truly vacant lots INSIDE the stated boundaries of the market area containing the subject and ALL selected comparable sales.....and reconciles a credible value estimate relating similarities and differences with the SUBJECT's site. One may NOT throw a strong chain around a vacant lot sale from ANOTHER market area outside of that from which one's report was developed and hook that chain to a heavy-duty pick-up truck and HAUL that lot sale back over the line into the subject's market. That.......would be misleading. Markets differ, and land value can differ. It's not necessarily a $/sq.ft. thing for land valuation too. Aestetics and appeal are quite dominant in "pricing" land......and don't foget that "builder's lot premium" thing. They have mastered a fine art of sucking a buyer's wallet dry with elaborate explanations of why some of their sites are "worth" so much more. maybe we have to learn their techniques and apply that to our site valuation process too.

Sometimes, there are NO recent vacant lot sales (recorded and/or accessible in public datbases) within the subject's immediate market area and within the regular course-of-business (i.e. agreed and paid-for S.o.W.). Sorry, Mr. Client, why don't you AND your borrower simply contact the insurance company mentioned by him and communicate with their agent to provide the insurance value necessary to satisfy all parties and take this loan transaction further toward completion. Maybe the agent will have to visit the property too. They also should SEE the home on which the policy will be written. You could subtract their insurance value from my market value and that might tell you a site value.....from YOUR calculations. Great, very well, then.

Ross what was the original question?

Original question: Cost approach not needed.
Answer. Not required but typically asked for
Weight minimal if older SFR improvement (way to high including depreciation usally)Shows incureable ext obsolesence. should be ND not developed

Nobody said that you pick other areas for sales and then explain the area differences. Actual my working experience is that site value typically represents 30-35% for newer homogeneous track home areas. Thats a fact here in our area not a myth because we do subdivisions out of this office frequently all over the state( 3 subdivisions just this month). Thats just the way the developers price them out with covenants. Its the beginning stage (not just something to be universally critsized) of homogeneous controlled developements(its almost common knowledge). If thats not a baseline thought for the beginning of your site value analysis then you are truly in the dark. When there are differences greater than that range those times are pretty obvious almost glaring at you like a shared driveway easement YOU WILL BE ABLE TO TELL. But you need a beginning number THAT IS TYPICAL FOR THE AREA TO START WITH BASED ON EXPERIENCE. then you make adjustments from there.
Regardless of older dated material(the original format was summaty abreviated history again you chose to critisize). And the reality today is thats why most Lenders are still requiring it because they are hung up on it, but it really does not make the approach more practical or applicable. We are still looking for the answer from you for the question. As you would concede the value including depreciation is already way over your market approach for older SFR's anyway. IS it needed or practical Ross?
Finally
There is a better than average chance that if your house burnt down and you were just left the land that the INSURANCE company and Realtor would again SPRINGBOARD their market value analysis from a 30%+/-standpoint of the neighborhood median price with adjustments for local marketing benefits like(but limited to(cause I do not want to hear it): site size,location and view

This baseline fundamental knowledge can be applied to a minimum of about 80%+ of homogeneous subdivision's. There are time when the numbers vary to quite a degree AND THATS WHAT THE BANKS WANT TO KNOW MOST but again MOST of the time these large site to improved value differences STAND WAY OUT. Have you ever thought why? Probably had nothing to do with ABOUT 30% developers planning market for site to improvements ratios. It proves more than not is a good INITIAL IDEA to start not FINISH. When there are sales of course we use them to if not in the area AND the competing area's. We also check against tax value and interview the assessor for their input and percentages as applicable but they are usually lower than cost even valued new with completed sale disclosure as they can only typically raise the values by 3%+/- for older properties they will typically reduce the site value to 90% of contracted price. Thats just our area Ross please do not tear that up to. What I am trying to do is help people go find out themselves while giving them a INITIAL BEARING. I love constructive debate.
Why people take time to attack others WHEN THEY KNOW IT MAKES NO DIFFERENCE. Dont know
Okay please Ross tell all of us the answer to the original question dont just CONTRIBUTE. Give us something we can "hook our chain too" Maybe you can show us how to work the 1007 and share some of your site extraction tips as well. But please dont use the 30%-35% of site value as an INITIAL indicator because it IS BELOW you. Developers use it, Brokers use it. It's common knowledge on underwriting technical reviews heck it the way you would price your lots in a new subdivision(sorry probably not)
Tell us IS the cost approach needed from your perspective?
How do we comply. Anxiously waiting but headed back to the beach! You can play BArney Fife. I am trying out for Andy Griffin. No bullets please!

 

[Fred]

Tell us IS the cost approach needed from your perspective?

Not for market value of the whole property and not for market value of the site.