But most of the time the competent ones don't;
The use of the available tools - income and cost as well as sales is the mark of a competent appraiser. I had some 4 plexes to appraise. 1 had no garage, just a parking lot. 1 4plex had a carport that the cars could pull under. And the third had a garage (1 car) for each unit. Rents were 800, $875 and $950 respectively. What was the adjustment for the comparables? Well...if you calculated the GRM at 150 from the comps, looks to me like a garage was worth $15,000 over one where you parked in a parking lot. And, $7,500 for a carport. Impossible you say? Can't use income and cost???
They do add for entrepreneurial incentive
They think more in terms of contingency than EI. They expect to find undisclosed issues, especially on an REO. So they are weighing both risk and reward. But every flipper uses their own metric to decide when to pull the trigger.
The topic is using straight cost as the adjustment
The topic is why JG cannot fathom how the textbooks would think an adjustment can be done by "Cost Related Analysis". Sales are the know all, end all of everything. Costs and income should be ignored on everything. Again I challenge you to pull up any set of sales - but make it easy - only 6 comps. Now how do you extract the value of say a fireplace. OK. First you have to equalize 6 comps on every other level. You adjust ages and sizes, before you can do the calculus on the fireplace. But let's assume you have sales in a new cookie cutter subdivision. 1 has a fireplace. Waz it worf?
You might have the sale of $245,000, $241,000, $254,000, $244,000, $239,000, and $257,000. The $254k sale has a fireplace. What is the adjustment? Is it $7k, $13k, $10k, $15k, or a negative $3,000??? Do we average? kick out low and high and average? Pick the least one? Tell me that the cost isn't more "accurate" than the paired sales... And to complicate matters what happens when 2 out of the 6 has a fireplace? Most appraisers will only cherry pick the pairs that "work" for their own pre-concieved ideas. So if they think it should be a $5,000 adjustment, they just pick the pairs that supports that.
This is why paired sales are not particularly accurate. MLR OTOH might give you a number as well - but is that going to be accurate or simply an average of the indicated values? What method is the most accurate and repeatable? And it has to be the cost related method. Nothing else can do it.
Isolated paired sales are worse than inaccurate. They are misleading.
1-2 1-3 1-4 1-5 1-6 2-3 2-4 2-5 2-6 3 -4 3-5 3-6 4-5 4-6 5-6
That is 15 pairs, if you are trying to "pair" a common item such as SF, age, etc. You end up with some kind of range of value. But a unique item? Your data are complicated by the fact that any given sale might have some amount of uncertainty in the final number you may not be aware of. What is the typical variation in price in a cookie cutter subdivision built by one builder - say Horton.
I am analyzing some sales of duplexes now. I appraised 3 of my sales for an estate back early in the year- 3 sales bought new in 2002 when this small duplex subdivision was developed. These would be the first sale since the developer built them. And 2 of them sold for about what I appraised it for. 1 was 2 story, 1 was 1 story. But the third also 2 story? They sold it for $45,000 less than I appraised it... (all three very similar in age, quality, etc.) In fact, that duplex got $25 a month more rents than the others as they had one new renter and he was paying a higher rent. Why did that duplex sell for less? I have no idea. My guess is that one guy - who bought two of them - was wanting the income, perhaps intended to raise the rents (they were low) but couldn't buy all three. And the last sold less for no apparent reason. In fact, it was listed at $25k+ over my appraisal, stayed on the market 2 months and they sold for $70k under the list price...It was on the market the longest. Last to sell. Did the seller just grow weary of dealing with the estate, collecting rents, and wanted shed of it? The property manager who contracted me to value the estate had no clue and, in fact, was surprised when the heirs put them up for sale as they had said they were going to run them like their dad had - i.e.- let the management company place renters, etc. and they get paid as the owner is a passive owner.
My point is - 'accuracy' is measured terms of a shotgun, not a Biathlon rifle. These "market" numbers are imprecise and therefore "cost" is often a far more precise and accurate both number.
Depreciated cost estimates is proper term.
The Appraisal of Real Estate called in "Cost Related Analysis".
So again what is the "natural" variation in sales? Below are homes UC currently, sold in the past year or less by Horton. Many exactly the same size, all are stock plans, but not the same price... and you expect to extract a more reasonable contributory value from them than simple cost related adjustment? There are 4 newest ones sold on the left - 8k difference - 3% variation...you cannot support extraction nor paired sales any better than you can depreciated costs.
