Appraisers' Free Forum

**Bill Caudell** · Posted: Sat Dec 15, 2007 4:34 pm Post subject: Cost Approach to Value

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.
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Bill Caudell

**Jim Plante** · Posted: Sat Dec 15, 2007 6:09 pm Post subject:

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.
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Jim Plante

**Bill Caudell** · Posted: Sat Dec 15, 2007 7:19 pm Post subject:

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.
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Bill Caudell

**Edd Gillespie** · Certified General Joined: 13 Aug 2007 Posts: 2282

**benluby** · Certified Residential Joined: 12 Aug 2007 Posts: 1576

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?
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Whoever thinks herding cats is impossible, has never walked with an open can of Tuna.

**Bill Caudell** · Posted: Sun Dec 16, 2007 1:09 pm Post subject:

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
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Bill Caudell

**Jim Plante** · Posted: Thu Feb 14, 2008 9:43 pm Post subject:

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?
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Jim Plante

**Pina Colada** · Certified General Joined: 13 Aug 2007 Posts: 554

**Jim Plante** · Posted: Fri Feb 15, 2008 8:27 am Post subject:

**Pina Colada** · Certified General Joined: 13 Aug 2007 Posts: 554

**Steve Owen** · Posted: Fri Feb 15, 2008 11:45 am Post subject: Re: Cost Approach to Value

**Bill Caudell** · Posted: Fri Feb 15, 2008 4:50 pm Post subject:

**Jim Plante** · Posted: Fri Feb 15, 2008 8:56 pm Post subject:

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.
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Jim Plante