Appraisers' Free Forum

Cost Approach has been widely repudiated but obviously, the most basic principles of the Cost App are not well understood..In the "dark side" forum, the point was much belabored when Ray MXXXXX couldn't figure out why the SA was coming in well below $100,000 but CA was over $200,000...I would say that something was wrong...mainly the understanding that External obsolescence can be derived from the market...

Making me think a nice simple CA class is needed...maybe 2 days. One for Res. One for non-res buildings...

Mode Edit to remove his last name - we all know who he is.

AI has a course: Residential Site Valuation and Cost Approach is a two-day course with exam being given several times in various places for the rest of the year. It's also available as an online course.

AI has a separate course for commercial work: General Appraiser Site Valuation and Cost Approach. But it's four days instead of two. It is not offered online at this time (thank God), but there are several more classroom offerings than the Res course.

You have to take the advanced report writing courses to see how the three approaches are integrated, and to see that they all function together to reach a supported value opinion.

I remember on the "other" forum several years ago, PC was explaining that there's no such thing as three independent approaches; that they all worked together and were mutually interdependent. Imagine my surprise when I read the instructions for an assignment in HBU in one of AI's advanced writing courses. The instructions said that one might have to complete all three approaches to reach a conclusion of HBU!

Then along comes a guy named George Cox, and publishes an article that put forth that one should choose THE approach to use based on the type of property! My board picked that one up and republished it in their newsletter. (Then they required that I do a demo containing all three approaches. Go figure.) I've been trying to find that article for several months now; it must've been lost when my hard disk bit the dust last year. I think Cox is correct: The type of property will govern the dominant approach--the one most heavily relied upon to reach the opinion of value. He just doesn't mention that adjustments in the selected approach may have to be derived using one or more of the other approaches.

I agree that there is usually a "best" approach, but on many properties, like agriculture, the Cost App is important as well as the sales approach and income approaches. It might take all three and the property situation might dictate the outcome.

F. I. - A sudden change in the chicken market, such as is going on with the bankruptcy of Pilgrim's Pride. They close a plant and idle farmers with contracts (batch contracts). That farm is idle.. no income but the past income was good...If the farm sells (and it won't sell for any but a fraction of the prior value), then sales are important. But a buyer or existing owner in desperation may seek an alternative contract (and this may involve a sudden 'glut' of growers) or may start up an independent operation.

We currently have some organic egg producers who are going it alone after Moark pulled all contracts in E. OK and W. AR due to an on-going lawsuit that the state of Oklahoma has against the poultry growers. The cost approach is important to measure the economic obsolescence (External) that results from the change in the market. The income app might measure the potential for redevelopment as an independent operation. And sales is where the rubber meets the road in a distressed market.

Terry, we offer that class but perhaps a new, more relevant o rural properties, is appropriate. Hint, hint ........

Ter - I edited your post to remove Ray's last name - we all know who he is. And this example might help some understand why the state was after him so much (IMHO) and I mean no offense to him. There are those that get it and those that don't. There are plenty of class offered by the AI, ASA, NAIFA and other organizations that cover this - this is appraising 101.

Making me think a nice simple CA class is needed...maybe 2 days

You could make it 2-3 months. That's how long some threads last. You could make it 10 years. That's almost how long some have been on the internet trying to see if anyone can reconcile the contradictions and circular reasoning of applying the cost approach to market value. You can make it 20 years, because that is how long I have been asking, since the first time it was explained to me, and I said, "You're just kidding, right?"

I can tell you I have never had a communication problem with a client or intended user on the cost approach. For example, when the XYZ condo project needs to renew their casualty insurance, the condo board, the insurance company and I are in sync. Or for example, where the tenant's long term lease is expiring, and the market value of the property is $1.5 mil, but it would cost them $2.5 (before moving costs) to build a new, I have never had a buyer or seller understand the tenant's breakeven price is closer to 2.5 than 1.5, and that the tenant will almost surely pay more than anyone, even someone in the same business who doesn't have to adapt the improvements. The only problems with cost approach I am aware of, is when people try to apply it to the type of value it applies to least - market value.

The cost approach is important to measure the economic obsolescence

I have long past given up the idea that any appraiser offering such a conclusion can support it or will even try.

Let me first state, I don't recall and can't imagine an assignment where I need to estimate so-called economic obsolescence. Second, I wan't to use a war story to illustrate.

There was a proposed gov't purchase of property. By regulation and because of some dispute, there were several appraisals. Most capped income to about 650. One capped income to 600k, and claimed to "right" because of being the one with two approaches. This "right" and noisy appraiser yapped about obsolescence this, that or the other thing while estimating cost at $1 mil, and thus ec obs of 400k.

This part is for you, Ter. Even if you could get rational people to accept that $400k is "the" obs or "the" depreciation, how would you get someone to believe this guy found it with the cost approach. It seems obvious, he found it with the income approach, by subtracting the income approach results from the cost.

In the ensuing callbacks, I found the client had no trouble understanding a few key points.
First, the client did not have trouble understanding that noisemaker did not really do two approaches. I pointed out that I could subtract my 650k from the mil, to get 350k in "obs." Then, by the same circular reasoning, go $1 mil - 350k = 650 (falsely, in my opinion) by a second approach, and also (falsely) claim to have now come up with 650 two different ways.
Second, the client did not have any trouble understanding that the cost approach was based on the - you tell me - hypothesis, assumption that if the building were new and in a perfect market, it would sell for $1 million. And that not only did we just have to take old noisy's word for it, we could argue that the new building in the perfect market would sell for $2 or $3 million, and using the same series of circular calculations, just keep coming back to the same capitalized value.
Third, the client did not have much trouble understanding that even if one bought into the perfect market hypothesis, one would still need a pretty fair load of comps to say how much of the "obs" or dep was due to age, function or the lack of a "perfect" economy.

So Ter, you don't have to explain why ec obs is relevant. I'd just like to see an example showing that one has to use the cost approach to find it. In my understanding, one doesn't have to use the cost approach to find it, but must use one of the other approaches to find it - as in my war story. Even the text book defintion - the difference between cost value - is one that clearly does not rope anyone into doing the cost approach. So, what do you base your opinion on?

I remember on the "other" forum several years ago, PC was explaining that there's no such thing as three independent approaches; that they all worked together and were mutually interdependent.

I find it hard to believe I ever said that. I am quite sure, I have contradicted that dozens of times in at least four chat rooms.

To the contrary, I have posted many times that an approach (approaches or appraisals) are whatever the person doing them makes them into. Approaches are not machines, like a gun, which has a predictable recoil, regardless of who pulls the trigger.
1. No approach is inherently independent or not independent (it's what the appraiser makes it into.
2. It is perfectly possible to have three independent approaches, say for market value, on ANY property type including vacant land. The chances are that two of them will be meaningless.
3. I don't know what an interdependent approach (or dependent) approach is. If you meant something like a talked about in my last post, as you can see, I am likely to observe that there really wasn't a second approach or method.

I think Cox is correct: The type of property will govern the dominant approach-

No more than the type of value. Try doing insurable value appraisal without the cost approach. You might find that the type of property alone gives you the approach, but might still need type of value to tell you how to apply it. Again Jim, approaches are not machines and they are not automated to produce results with a preset meaning.

One of my persistent observations is the degree to which the rest of you guys use assumptions without stating them. Perhaps Cox was only referring to market value and either he and/or you forgot to say so. The statement is much closer to being correct that way.

Is the attached article the one you refer to?

3. I don't know what an interdependent approach (or dependent) approach is. If you meant something like a talked about in my last post, as you can see, I am likely to observe that there really wasn't a second approach or method.

I was referring to your unified field theory of appraisal. And I think all of us were talking about market value w/r/t the three approaches.

The approaches are interdependent the way they're being taught at present. (And just to be excruciatingly precise, I *am* referring to market value here.) You might derive a location adjustment in the SCA out of a rent penalty found in the IA; you get your CA depreciation from RCN vs. SCA less site value. And you might derive IA adjustments for site size by paired sales from the SCA. So I think you're correct in saying that there's really only one approach. The section of that approach (CA, SCA, or IA) that carries the most weight depends on the actions of buyers, the condition of the market, and the intended use of the appraisal.

So I think you're correct in saying that there's really only one approach.

I say again, I am not now and have never said there is only one approach. Sales comparison is definitively not the cost approach.