Appraisers' Free Forum

If, you have the time and would like to respond to the following question, I will thank you in advance.

Describe or state reasons you have devoloped Cost, Sales, and Income Approach to Value (weighted all three) in a multi-unit apartment complex that was 15+ years old and used the Cost Approach to Value as your primary indication of value (if in fact you ever have)?

I read three reports by the same appraiser (all similar properties in the same mid-sized town) and one report used Inome Approach to Value as the most weighted. The other two reports used the Cost Approach to Value as the most weighted. It leaves me wondering when a situation such as this would/could exist.

I suppose the writer of those reports didn't bother to explain why he weighted one approach over the others.

Personally, I find the cost approach to be useful for the feasibility/maximal productivity section of the HBU analysis. I don't think it has anything to do with market value as an independent approach. I cannot envision any instance in a market value appraisal where I'd rely on the cost approach. Some may say "unique properties," to which I answer that the cost approach provides a value in use, not a market value.

I weight the sales comparison approach when a property is owner-occupied. Example: Three-unit office building, buyer to occupy one unit and rent out the other two. (Assuming that the rest of the market behaves similarly.)

The income approach gets weighted when the bulk of the buyers purchase similar property for the income stream.

The final reconciliation of each report had verbage about why the approach was given most weight.
In two reports the appraisal stated the cost was the approach the typical buyer would use.
In the third report the appraisal stated the income was the approach the typical buyer would use.
All three reports were on similar properties within 2 miles of each other in the same town.

I think the income stream is the viewpoint the typical buyer would give the most consideration, in their purchasing price decision, of properties of this type.

Bill Caudell wrote:I think the income stream is the viewpoint the typical buyer would give the most consideration, in their purchasing price decision, of properties of this type.

That may be correct, but not infrequently the buyers' needs may revolve around a 1031 exchange. The value to them may have to do with tax protection. I think either way that the appraiser is obligated to complete the income approach. I agree with Jim that the cost approach becomes valid as the primary approach in value in use. Indeed, it may be the only approach.

I have to agree with Jim and Edd. The cost approach, to me, is most useful on a value in use, such as a church, school, some other unique structure that truly has no market value per se.
If these are SFR's, I would have to ask, is there so very few comparables that one must resort to another means?
Sounds like one of the three is a rental unit, and thus the appraiser simply decided since it was a rental the income approach was most valid, but, in an SFR, that is not it's primary purpose, so I would still be hesitant to give it most weight.
How few comparables do you have? How wide is the margin on adjustments?

6 unit apartment building 317 income 490 sales 582 cost
6 unit apartment building 317 income 510 sales 590 cost
13 unit apartment building 739 income 632 sales 680 cost

appraisal reports indicate value as 582, 590, and 739 respectively

it just seemed odd to me in one the final indicates income as best and the other two cost as best indicators
remember same town same neighborhood etc.
looked like hitting an accumlative number for loan purposes at first glance and even second glance

Bill,
This thread's a little old, but I've got a pertinent question: What were the cap rates used on those income approaches, and how were they concluded (e.g., market extraction, band of investments, or reconciled from other cap rates?)

And there's something else interesting in your last post: It only costs another 90-100K to add seven more units. What gives with that?

Describe or state reasons you have devoloped Cost, Sales, and Income Approach to Value (weighted all three) in a multi-unit apartment complex

Never weighted three approaches in any single appraisal. Have done consulting where I used each of three approaches to develop three different types of value for the same property.

6 unit apartment building 317 income 490 sales 582 cost
6 unit apartment building 317 income 510 sales 590 cost
13 unit apartment building 739 income 632 sales 680 cost

That’s a more eloquent argument why all three approaches should not be weighted than I can come up with. Imagine what the comments would be if you posted that three appraisal companies, each using their AVM, reported 317, 490 and 582 for the same house.

the appraisal stated the cost was the approach the typical buyer would use.

I am sure this conclusion isn't supported, because it isn't supportable.

I find the cost approach to be useful for the feasibility/maximal productivity section of the HBU analysis

Interesting, Jim. I find the cost estimate as critical to feasibility as I find oxygen critical to living. However, the cost approach to market value is something I have never needed for feasibility.

Interesting, Jim. I find the cost estimate as critical to feasibility as I find oxygen critical to living. However, the cost approach to market value is something I have never needed for feasibility.

Damn. Caught again

Good catch, PC, and this is a distinction that everyone needs to keep in mind.

Jim Plante wrote: Good catch, PC, and this is a distinction that everyone needs to keep in mind.

It seems like no one does. A couple of months ago, someone asked me how I had the resources to make 9,000 posts as an internet persona. I replied, that I have really only made 10 posts. But I made them 900 times each. That was one of the 10.

Bill Caudell wrote:...15+ years old and used the Cost Approach to Value as your primary indication of value (if in fact you ever have)?

I never have. It's hard to imagine a situation where income data would not be available for that kind of property. If income data is available, it is hard to imagine that not being the most weighted approach.

Jim Plante wrote:Bill,
This thread's a little old, but I've got a pertinent question: What were the cap rates used on those income approaches, and how were they concluded (e.g., market extraction, band of investments, or reconciled from other cap rates?)

And there's something else interesting in your last post: It only costs another 90-100K to add seven more units. What gives with that?

9.5 caps
band of investment

I was wondering the same about the cost for additional units from the conclusions one could draw from the data included in the report(s).

I think I read appraisals that lacked some credibility, due to the lack of consistent methodology.

Band of investment without support for the Re means he tricked out the Re to get the cap rate he wanted. Kinda like the guy who gimmicks the effective age to make a comp work, or who backs into the cost approach showing it to equal the SCA.

There may be some economy of scale at work on the larger unit, but I'd bet it isn't *that* much economy of scale.