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Question regarding Cost Approach!

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sammiboii

Freshman Member
Joined
Sep 6, 2007
Professional Status
Certified Residential Appraiser
State
North Carolina
I have been appraising since 2002 and certified since 06. I have been taught that you look at Marshall and Swift for the figures to utilize in the Cost Approach and it is what it is. It could be higher than market value or lower.

I am now being told by someone that the Cost Approach should always come out higher than the Market Approach. Why does it have to come higher? We rely on Marshall and Swift and if that's what they're saying and that's their job (which is the recognized industry standard) then am I missing something?

For now I am doing appraisals my way, using Marshall and Swift. I don't see the reasoning behind what this other appraiser is saying.

HELP!!!!
Sam
 

RSW

Elite Member
Joined
Feb 18, 2002
Professional Status
Certified Residential Appraiser
State
Tennessee
I have a mixture of higher and lower figures with the cost approach. There are many things that may effect the final value in the cost approach such as the correct effective age, quality rating, and land values. If any of these things are not reported correctly your final value will be off.
 

Michigan CG

Moderator
Staff member
Moderator
Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
I am now being told by someone that the Cost Approach should always come out higher than the Market Approach.

That is wrong. Generally Cost NEW will come out higher, but after depreciation it could be higher or lower depending on your data.
 

Blueprint

Senior Member
Joined
Aug 25, 2005
Professional Status
Certified Residential Appraiser
State
Oregon
I am now being told by someone that the Cost Approach should always come out higher than the Market Approach.

Is this a seasoned appraiser that is telling you this? That may be their thinking because market values are dropping faster than costs. Regardless, that is incorrect.
 

sammiboii

Freshman Member
Joined
Sep 6, 2007
Professional Status
Certified Residential Appraiser
State
North Carolina
God I hate to admit this but they've been appraising longer than me, and they've been doing it that way the entire time.
 

Mr Rex

Elite Member
Joined
Jan 12, 2004
Professional Status
Certified Residential Appraiser
State
North Carolina
Its an old wives tale, and still told by some CE providers that need to hang it up.
 

stefan olafson

Senior Member
Joined
Apr 2, 2003
Professional Status
Certified General Appraiser
State
North Dakota
I teach at the university level and I tell my students one important thing when considering the cost approach. Cost Typically Does Not Equal Value in the Cost Approach. It may be higher or it may be lower? Given todays market in some areas of the country It would be very fair to say where the market has went to hell, that cost is going to be above market in most instances. In the areas of the country not affected by all the foreclosures, cost may well be below market still in most instances.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
I have been taught that you look at Marshall and Swift for the figures to utilize in the Cost Approach and it is what it is. It could be higher than market value or lower.
M & S is not the final word. The local building cost should be. The fact is market conditions dictate whether the market will pay more or less than cost. In a falling market, its more likely that cost will exceed sales unless you use a negative Enterprenuerial Profit factor...which cost books don't include (out of practical considerations that are wholly sane to me.) In rising markets, the cost appraisal will lag sales despite EP - because builders are raising margins according to demand. E. P. is another fantasy that muddies the appraisal sciences into the swamp of fable and voodoo. There is, without a doubt , more bad cost approach information than any other aspect of appraising.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
I am now being told by someone that the Cost Approach should always come out higher than the Market Approach. Why does it have to come higher?
I thought it was always supposed to come out lower?

That's why I don't it use for MV. I can't remember where I am supposed to make it come out. :)

E. P. is another fantasy that muddies the appraisal sciences into the swamp of fable and voodoo.
Only because that is where the cost approach is to begin with. :)
 

c w d

Senior Member
Joined
Oct 2, 2006
Professional Status
General Public
State
Florida
M & S is not the final word. The local building cost should be. The fact is market conditions dictate whether the market will pay more or less than cost. In a falling market, its more likely that cost will exceed sales unless you use a negative Enterprenuerial Profit factor...which cost books don't include (out of practical considerations that are wholly sane to me.) In rising markets, the cost appraisal will lag sales despite EP - because builders are raising margins according to demand. E. P. is another fantasy that muddies the appraisal sciences into the swamp of fable and voodoo. There is, without a doubt , more bad cost approach information than any other aspect of appraising.

I could have swore the forum had this conversation a few months ago in depth and the general consensus was that if E.P. wasn't included then we didn't know what we were doing. Now you're telling me E.P. is a fanciful concept someone pulls out of the air based on the differences between the two approaches? I'm confused. I had almost convinced myself that perhaps I should start using E.P.
 
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