Returning to Requiring the Cost Approach
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…the Cost Approach is the most INACCURATE of the three current ‘Approaches’ we use…
Appraisers, for the past few weeks, emails have been sent by a third party asking appraisers to complete a survey about the appraisal process and the current forms. I did so; you should also.
But I wanted to expand on one aspect of the survey. Two separate questions, on different survey pages, related to the Cost Approach (CA). These questions wanted appraisers to state their opinion about 1) if the forms provide adequate detail to develop a CA, and 2) if it is or is not easy to develop a CA opinion using the current form entry fields in the Cost Approach section.
Fireworks went off in my retina’s when I read those questions!
To go back in history, the CA has been an ‘Approach’ we can use to develop an Opinion of Market Value, ever since appraisal theory and methodology was developed in the 1930’s. It’s been part of the appraisal forms since the original Green Hornet form was developed and adopted by the Savings and Loan Associations. Then in 1986, the GSE‘s took over forms development, and the URAR was mandated, with the CA being a ‘required’ entry. However, in the forms revisions dating in 2005, the GSE’s decided to make the CA “optional”, with their statement that the CA was ‘not required’ – unless the appraiser or a client determined that it was necessary to include in the report.
In my humble opinion, the CA is the most INACCURATE of the three current ‘Approaches’ we use. The CA is based on subjective reporting by the appraiser, and this subjectiveness can and does vary among appraisers. And it’s calculated by using straight line depreciation, which assumes all building components age (or depreciate) at the same rate. That is false.
I mentioned above that the CA became optional. This was largely due to the way the CA was being calculated by appraisers up to the 2005 revision. Many appraisers have not been well trained in doing cost approach calculations ‘correctly’, which is a term the CA advocates always use, without revealing what is needed to be ‘correct’. Plus, many users of appraisal reports also had and have a misunderstanding of how the CA relates to the Sales Comparison Approach (SCA) and the Income Approach. Too many believe the CA should mirror the SCA almost exactly. It seldom does, unless creative math is used to jiggle the numbers. The description used often is “appraisers back into the CA” just to make it look good. But the GSE’s expect the data on the forms to be accurate, not just to look good.
Back to the survey. Two questions, in different parts of the UAD survey pages, tells me the GSE’s are again strongly considering returning to “requiring” the Cost Approach in the yet-to-be-released updated forms.
This was the only set of duplicated questions on the survey, asked in different wording.
Anyone care to bet against me??