Returning to Requiring the Cost Approach

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Dave Towne

Certified Residential RE Appraiser at Towne Appraisals
AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003.
Dave Towne on e-AppraisersDirectory.com
Dave Towne

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Will the Cost Approach be Required in the Redesigned UAD Forms?

…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??

Image credit flickr - David Goehring
Dave Towne

Dave Towne

AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003. Dave Towne on e-AppraisersDirectory.com

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41 Responses

  1. Excellent article Dave!

    We wrote this a while ago, but your post prompted us to go public now.

    Can we trust the cost approach? No.
    http://www.tncresappraisals.com/blog/2019/5/1/can-we-trust-the-cost-approach

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  2. Avatar CJK says:

    In my 36 years I have never used the CA to determine the estimation of value. Nor has any lender ever used it to determine the loan amount. Even so, all of my clients require me to complete it. No matter how many times I try to explain, I always get the same answer: “our investor says.” So, the investor needs the CA for a 120 year old property in a market that has not had a land sale in 90 years? I have come to the conclusion that the investors just want all of the boxes checked on the form, most of these dimwits have know idea what they are doing. They do not even know the difference between replacement vs reproduction. If the CA is less than the sales approach they lose it, if the final value was based on the CA they would say: “that cannot be.” So, what the hell is the point. The fault is on the lending side, many of the people who order the appraisals are not appraisers, many of the people who “review” the reports are not appraisers, and the people who come up with the lending guidelines do not even understand basic appraisal 101. How many buyers use the CA when they are getting ready to put in an offer? I think the CA is used by the lenders for insurance, which is a big no, no.

    “This report was not completed for any insurance purposes.”

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    • Avatar don says:

      Forty years ago I built my own home, I submitted the highest bids from the subcontractors. The Saving and Loan who, had in-house appraisers accepted the highest bids. S&Ls competing used to compete on Rate, points and simple v compound rates during construction, lots of complexities.

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  3. Baggins Baggins says:

    CJK, that’s one of the tougher issues to get your mind around. The emerging excessive data integration game has brought about a new standard where the appraisers opinion of land value is used as a basis for required mortgage insurability. The process clerks demand the cost approach, but all the lenders really need to process the mortgage insurance is a land value so the insurer can have a reliable land to home value ratio for insurability amount.

    Appraisers whom copy in arrears assessed land value statements are doing it wrong. Appraisers whom fill the cost approach every time are putting in too much effort, getting too much exposure. All you need to circumvent that sow point is a scaled up land value. Your client needs to be sensible enough to accept that and many are. The only cost approaches I’ve completed in many years are for manufactured, otherwise all I have in the cost box is land value. It’s my understanding the virtual stip point there is absence of land value statement, which then morphs into a complete CA request.

    I found the uad survey points regarding reference to inadequate verbatim explanation to be telling. There were several questions apparently focused on having more data entry fields to effectively substitute for written analysis. If this was poker, the mismo group would have just laid all the cards down face up. The projected message, intentional or not, appears to be exploring the concept of not requiring any unique language, and a move towards more detailed static, data mineable form filling.

    With so many appraisers derelict in their duty, using outsourced typing services, auto mapping data without redundant data verification, see addenda shortcutting and excess use of boilerplate, a move towards more robust data entry in mineable fields was inevitable. Appraisers asked for it through their use of third party form filler and typist services. I don’t think appraisers are going to be all that happy with the new forms which completely reform hardstops, required data analysis via charts and graphs in fnma form (think MC on steroids with excel integration), and ultimately de emphasizes the art and free writing explanative side of reporting. The survey appeared to be a litmus test to see how receptive appraisers would be to a completely new approach which would remove subjective conclusions, and replace that with analyticaly supported requirements in form. The art not a science argument hangs by a thread, dependent on what approach updated gse forms may take. Be careful what you wish for and I strongly disagreed with all those points. Also I popped in a quick statement there that I think new forms should include total consumer fee breakdown between all parties, specifically detailing if appraisers used outsourced services, those company names, and costs of those services, in form of course. Ten years they told me the end was near, but somehow I found a way around that. The more dramatic the upcoming changes to form are, the more disrupted our industry will become.

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    • Baggins Baggins says:

      Just a quick add on. If you can talk the language of real estate, you should be able to type the language of real estate. It only takes an hour or two to completely fill all form locations and write a unique addenda regarding the process of data research, data filtration, analysis conclusions, and general statements on the market. What appraisers don’t seem to understand about typing services is that the ‘typists’ service is a click and go assimilation of pre written language points which the typists have cleverly plagiarized from other ‘reporting samples’ they have appraisers submit. On the CU side, they must be seeing an ever growing excess of identically copied boilerplate statements from appraisers with no apparent relationship to each other. So much so, they’re asking themselves, why bother with any reading, most of these appraisers are not putting anything unique there anyways. I like typershark which increased my typing skills. I track dang near 100 to 120 wpm with 1-3% error rate. My statements are sometimes redundant, one report to the next, but because I always free write, the language assimilation is never identical and there is always some movement towards key and unique analysis points. It is my opinion that the faster you fill reports, the broader your liability exposure becomes. Take the time to do it manually. Time is money to lawyers and forensic review firms. You can take the target off of your back by investing more time into unique and meaningful simple reporting. The very last thing an apprentice should be tasked with is free writing, adjustments, and value conclusions. Sadly, that’s usually where apprentices start. Because they don’t know what they’re doing, they lean on typing services. The people most responsible for the sweeping changes to this industry are the appraisers themselves.

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      • Avatar don says:

        RIGHT ONN!

        In the 1930s Deflation was rampant prices and values were going down Labor, material, their was no capital, except where there was $.

        Then slowly came change. Costs were the first reliable indicator.

        Inflation began imperceptibly, except for the studious who were keeping knowledgeable of costs.

        The cost approach seeeems a waste except to the studious who think change still occurs.

        The three approaches have definite reason if but for to illustrate change which is illusionary.

        Only a partial appraisal would exclude costs

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  4. Avatar Michael Curtis, SRA, AI-RRS says:

    I hope the GSA makes the Cost Approach mandatory and defines the word SUPPORT.

    In my opinion, the Cost Approach is best of the 3 approaches for determining value. It sets the upper end of value and serves as a form of checks and balances on the other 2 approaches. In new construction or homes less than 5 years old, it is very essential and very relevant. The reason that the Cost Approach is inaccurate and that Fannie Mae quit requiring it is that 70% of the appraisers out there do not have a clue on how to properly complete it. I see it every day in the reports that I review. Same old boilerplate comments saying that the only reason I am putting this in is that the lender requires it and that it is unreliable and not to be used for insurance purposes. Blah, blah, blah. Support for site value is always lacking; usually some B.S. boilerplate about no land sales and using extraction, yet no support or “proof” of how that number for the site value was arrived. Very rarely does an appraiser show how they came up with that number. The good ones are “I used either land sales when available or extraction (or God help me “abstraction”) or allocation or assessor’s value or a combination of these.” “The best sales are in my files at my office.” “Based on my knowledge and experience in the area, the value is ‘”$XXX”. In other words, you just put whatever number in there that you wanted to or what your appraisal dart board came up with. Rarely does it even come close to supporting the site adjustments in the Sales Comparison Approach. Most appraisers do not understand the Principle of Substitution. I reviewed a property in OR where there was a 50 year old property with no updating at all and the Cost Approach was nearly $700K less than the Sales Comparison. No support at all for site value other than “based on my knowledge of the area”. By the way, the site value was to the nearest $1 (something like $927,031). Most appraisers fall back on Marshall & Swift or make up some number based on “local building costs”. The truth of the matter is that costs and depreciation derived from the market are the most accurate. If the Cost Approach is coming out lower than the Sales Comparison, then the error is in the estimate of depreciation, the base cost or the estimate of site value; all of which can be derived from the market and are a lot more accurate than mathematical formulas or cost services. No market out there recognizes value in $1, $5 or $50 increments. Basic appraisal principles.

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    • Baggins Baggins says:

      You’ll never solve the issue of getting effective disclosure of profit ratios from builders… That won’t happen because their profits can be wildly varied based on opportunity of labor, the individual buyer, and the cost of lending through their own capitol suppliers. For secondary market sales, the go to cost approach development effort is to dial it in and back into the number as a supportive figure against mv rather than an independently derived ca figure. I’ll chime in with questions about cash equivalence over term as the fed continues to manipulate both the supply of, and cost of money. The cost approach is misleading when the base figures incorporate non disclosed estimates of representative and interests costs.

      In a perfect world where only the home is financed, and all other representative service costs were out of pocket hard costs, the cost approach would be meaningful. We’re nowhere near that point right now.

      Can you help me out with extrapolation of a provable inflation multiplier based on how many fiat dollars the fed rolls off the printing press daily, also incorporating the shifts in lending rates? Depreciation is relevant to the comparative quantity of updated materials, those funny depreciation scale charts are at times completely meaningless.

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    • Greg Wilkinson on Facebook Greg Wilkinson on Facebook says:

      You are so spot on. Sadly far too many appraisers don’t understand the importance of the cost approach so they just make up a reason why to not do it. We build one on every house we do. It helps the appraisers understand quality and depreciation but most importantly it helps the appraiser (and client should they wish to) understand if the sub-market it healthy, undervalued, or overvalued. I mentor and after a short period of time all of my trainees ask how someone can properly appraise a house without doing the cost approach. The light-bulb clicks on and it’s a beautiful thing.

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    • Michael; Absolutely Concur on how important it is and frequent lack of appraiser comprehension in applying it. Also, huge fan of significant number rounding, though as more and more reports use auto adjust or regression based numbers I’m seeing $1 increments (even by MAI’s). Not my preference, but at least it does tell me at a glance how they probably got their numbers.

      Don’t be too down on (proper) extraction though. In built-up urban areas, it’s rare that we have comparable land sales. Sometimes we have improved property sold for a new increased land value equal to its improved value. Legitimate sales, but their use is like an invitation to a ‘stip’ or revision fight-so personally I’d prefer proper extraction.

      There is a distinct difference between claiming extraction was used and actually doing it (properly). I use it 90% of the time (guessing as to % of time used). When I have vacant land (sites or lots) I use them. When I don’t, then extraction is my go-to..and my file is fully documented showing my specific calculations. More recently I have been including the actual calculations tied to the specific (identified) extracted comparable property. ON rare occasions when I am citing developer information I give name and number – usually as a supplement rather than the sole source.

      These extra steps take time, which is why I am so critically skeptical of the 2 to 3 “appraisals” a day claims

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  5. Dave, respectfully I could not disagree more. I will almost always include a cost approach analysis; carefully considered and with land (site) valuation carefully researched. Properly completed it IS supposed to illustrate market value.

    As frequently applied, it falls short of this. That’s not the fault of the approach but rather the carelessness of it’s application. The CA is often one of the easiest and best methods to support a GLA adjustment in the sales comparison. It may provide a sound basis (subject to sensitivity analysis) for lot size adjustments.

    It no longer depends on M&S as the sole source of credible costs. Personally, I think Craftsman is not only easier but generally more reliable in my area. MEANS is also a good alternative source.

    Yes, it requires a subjective opinion. As does every other approach. The biggest flaw with CA is that it has never (in my market area) accurately developed credible entrepreneurial profit ranges. That’s an easily augmented shortfall but one that absolutely requires the subjective application of surveys (developer or broker opinions). Again, it is the artful application of our craft rather than purely scientific or academic.

    We must never underestimate the importance of having a valid method to cross check our conclusions via the other approaches. The willingness (human nature) to bypass other steps when not absolutely required, often leaves only the sales comparison being applied…with a very high potential of circular thinking affecting the outcome.

    Applying the CA and Income Approaches whenever possible ‘keeps our subconscious honest.’ More than half (90%?) of all defective reports I’ve ever reviewed either omitted the CA or pulled CA data from thin air.

    I think of CA as the appraisers professional-life-preserver.

    A final reminder to others that don’t like using it because it’s difficult…every time we omit a professional process because it is difficult or time-consuming, we bring ourselves one step closer to being fully replaced by automation.

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    • Baggins Baggins says:

      I get it. Your points make sense. Don’t fool yourself though, the guys putting together those tables, as well as the avm guys, they’re often using the same WAGS method as appraisers. Wild ass guesses based on reasonable speculation. If it’s to be done right, we’ll all need to use that like 4+ page long form where we count every faucet, every light switch, calculate the total spacial area of siding, carpet, drywall, all of that. Why bother because the home is only worth what people will pay for them. What people are able to pay for them is dependent on a manipulated lending rate and the cost of money at that time. Borrowers are qualified on their ability to repay as the primary factor. Cost approach makes perfect sense for project investors, developers, wealthy estate holders, custom materials, the likes of that. For regular suburbia, condo’s, stock mass produced housing it’s the price of money which is more influential than the price of the homes production. I’ve heard that some highrises are markets to themselves, and would not dare touch a cost approach like that in the urban centers. If a meaningful long form cost approach is required on everything, double the fee and most likely double the eo insurability cost as well in short order. It could create an open door for litigation but perhaps that’s exactly what fnma wants? I’ve never even looked at means or craftsman. How much do those cost? You guys are going to give me nightmares over this mandatory cost approach talk. I can’t handle it. Cheers.

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      • Baggs, that level of detail is simply not required…and is hubris when used. Old MAI IRS buddy of mine (who used to teach M&S CA classes). He wanted input for a partially completed great house (meeting tribal hall and dorm style rooms upstairs. Built on permafrost in Alaska (forget about ANY sale comp within 50 to a 100 miles) with 6 to 8 feet high flooring. We did everything by the book and still had zero confidence in the results. The BEST we could do is conclude the taxpayers estimates were ‘credible’ (not that we said “Yes, that is correct-we were simply unable to say No, that is not correct”)

        It doesn’t always work for all situations. As for cost-I usually, get both hard copy and ebook. I think it was under $89 for both last times (2019); Haven’t bought Means for a few years so I don’t know.

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  6. Becky Lowell on Facebook Becky Lowell on Facebook says:

    … hopefully this is not a foreshadowing.

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  7. Avatar E J Brown says:

    Not to worry, once we start relying on 3rd party inspections everything will become Crystal Clear. Just like a cost approach for a 2055.

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    • Avatar CJK says:

      I am sure that the same appraisers who live and die by the CA will be able to tell you the replacement cost for a property that they have never even seen. This is what I want to know, if the desk top reports are the new kids on the block, how will the appraisers know if they need to make a location or view adjustment? The appraiser will no longer look at the subject, the appraisers will no longer drive the comparable, should be fun.

      The E&O insurance companies tell the appraisers to take photos of everything. Now the GSE does not want use to even leave our desk. Better check with your insurance to see if they will cover you when Chase starts looking for even more E&O payments. Will the GSE and the State back us when the #%&^ hits the fan, hell no.

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      • How can you possibly be sure of how I or anyone else will handle or communicate replacement costs?

        While not impossible, it is at best very difficult to offer an opinion of cost on a property never seen. It is also very difficult to accurately estimate physical depreciation; and next to impossible to identify and quantify many if not most functional or external inadequacies. Why would a desktop appraisal even consider a cost approach (other than as a specifically assumptive exercise)?

        FNMA UAD purports to identify how quality and condition are universally reported. I do not. While I consider all known elements, in the end, it is a subjective interpretation. One that varies from market to market. Good condition in Beverly Hills, CA may not be perceived the same as good condition in Lynwood, CA.

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  8. It’s interesting that in all the comments above, I did not read one comment about the reason I think the Cost Approach is being required. I think the lenders want a cheap way to obtain insurance on a property on which they want to make a loan.

    Look at the timing of this – just after the major fires in CA and the hurricanes on the Atlantic Coast.

    I appraise a lot of historical & architectural homes built from 1880’s to the 1920’s . I absolutely refuse to complete a Cost Approach unless the lender obtains one from a professional Insurance adjuster. Too much liability to under value an improvement like this.

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    • Avatar CJK says:

      I already said: “I think the CA is used by the lenders for insurance, which is a big no, no.”

      “This report was not completed for any insurance purposes.”

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    • Understandable concern. Why not charge a premium and use reproduction cost estimates instead? I think your example while a valid concern also tends to be an extreme exception. Again, barring specific SOW requiring an insurance ‘value’, my reports or not done for insurance.

      When used, any CA I do is for MY benefit.

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    • Avatar don says:

      Hi John, im going to the meeting wed, are you?

      How do some appraisers look at subject houses which have burned down to the foundation? Insurance appraisal work has a lot of stuff which is awkward to explain, including appraising something which you didn’t personally inspect. Obviously 36 years in the appraisal business wasn’t enough to see all the stuff which HAs tooo Go ON.

      Even bankers, & loan mortgage people have to understand other stuff is important besides FMV. And what about FMV, and the Appraisal for collateral assessment. Did the appraiser measure the Value for an 80% loan, or an 80% and two tens, or a 20% down with no equity? The 1004 form requires an explanation of the function and the use of the appraisal. Ain’t the function important to the value, ain’t the use and the function different and doesn’t financing Effect and affect value dramatically.

      Maybe The Point is that the 1004 form is more of a problem than a solution for the variety of functions and uses of appraisals, any how how would I know I ain’t got no credentials any more.

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  9. Avatar CJK says:

    Let’s put the almighty cost approach to the test. For fun this is a desk top report, you must complete the CA. The only thing you know about the property is what others have told you. I will make it simple for you by giving you the tap fees and site value. All hail the CA!

    Detached SF Ranch with a finished walk-out basement and a three car attached garage. The entry level offers a kitchen with appliances ceramic, tile floor and counter tops, the living room has vaulted ceilings, gas fire place, and new wood vinyl flooring. The three bedrooms have carpet, vaulted ceilings and double pane vinyl windows, the two bathrooms have vinyl tile floors, and ceramic tile shower walls. The walk-out basement has two bedrooms, one bathroom, a finished laundry room, and a utility room. When you look at the subject from the street it looks like a single level, when you look at it from the rear it looks like a two-story.

    Extra items include a landscaped site with sod, rook, sprinkler and rear wood fence. New roof and exterior painting in 2016. This property is serviced by all public utilities, an asphalt paved street with a three car concrete driveway. FNMA rating Q4 and C3. The site value is $70,000, the tap fees are $20,000. Each level is 1300 sf the garage is 600 sf, built in 1991, looks 10 years old. The property is located in the Springs Ranch development in Colorado Springs 80922.

    After you tell me what the replacement cost is via the CA, I will tell you what the same model home just sold for one block away. The first person who gets within $10,000 of that sales price will receive a free ice cream cone or I will give a homeless person $5. Zillow is off by over $21,000.

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    • Avatar E J Brown says:

      I’ve never done a report on a property I’ve never seen, I try and stay away from such things. Does a 3rd party inspector go into this much detail when they send you their info ?

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      • Avatar CJK says:

        I think they will just include some photos and basic comments. Completed by someone who makes $15 per report. That is my concern, how are appraisers going to do the CA, if the client requires it with a desk top report?

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      • Baggins Baggins says:

        Try 5.25 cents for a ‘home inspection.’ This is a real thing, and we found evidence of this happening in real time. Sorry, I’m not going to rely on some idiot who took a craigslist job for 5.25 cents and drove across town to do it.

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        • Avatar CJK says:

          I wonder how much they pay the appraiser $24.15?

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          • Baggins Baggins says:

            The above is an actual screen shot from an actual company whom actually sources ‘inspectors’ for appraisal hybrid inspections.

            The fee is clearly $5.25c. That’s not the only one we found like that either. Perhaps the web admin can link to the previous articles on the matter, there are so many.

            As if Mr Ford’s discovery of the ‘inspector’ having used obviously fraudulent photos and just copied photos to houses the photo did not belong to in the first place, and the hybrid realtor and appraiser just going with it, blissfully unaware.

            When was the last time an assessor posted information for the wrong house you know of? How about an incorrect flood map for a given property? How about the wrong title insurance? FNMA stating that use of third party home inspectors is ‘exactly the same’ as reliance on these other well established professions is an outright fabricated lie. Tell me one individual in the entire united states whom furnishes a flood plain inspection with associated data for 5 dollars. How about one single individual in the entire united states whom will issue title or assessment documents from a 1099 status for only 5 dollars. What a load of outright completely fabricated deceptive lies.

            Trust in FNMA is falling so quickly, it’s already through the floor with this hybrid and waiver nonsense. DOJ should be looking at them!

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      • You guys wouldn’t believe how sparse the explanations are. They would not be adequate for a restricted report let alone an “Appraisal Report” as these claim to be. AMCs think boilerplate assumptions cover them; and are all an appraiser needs. Even FNMAs form 1004P is pretty humble.

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    • That’s a test of the inadequacy of desktops and hybrids – not CA.

      $260-$275k as a 1,300 sf gla…Using all three traditional approaches – WAG; Divining Rod and Quija Board methodology without CA

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      • Avatar CJK says:

        $340,000, based on the sales approach (same model). All hail the CA.

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        • I’d like to see the comp address. Same subdivision you stated has upper 200’s to lower 300’s all over the place – two stories around 1700-2100+- sf. BTW – there was no CA. I merely clicked sales on a broad area map and looked at data…pretty much the way FNMAs AVM/CU does.

          All hail blind data.

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          • Avatar CJK says:

            7130 Allens Park Way, $345,000 (2/19) same basic model as the subject, street behind the subject. 6995 Battle Mountain Road, $336,000 (12/18) same basic model as the subject, same street as subject. My 12 year old grandson can look at sales on a broad area map. It’s a good thing that we still have appraiser’s who know what the hell they are doing.

            The appraisers who know the difference between a comparable and a sale. The appraisers who know the difference between a Ranch and a Two-story. The appraisers who know the difference between a tract housing and a custom built homes. The appraisers who know the difference between a R1-SFR zoning and a C5 commercial zoning. The appraisers who know the difference between a basement level and a lower level.

            Every so often one of my clients will ask me about some sales that they see on a map. When I tell them why these sales are not comparable, they close the loan. This is why I do not work for AMCs. I do not have the time for dimwits who are simply looking at sales on a map. Some seem to forget that appraisers should not be selecting comparables based on the sales price.

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            • Avatar don says:

              New year New prices?

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            • Allens park only-(assuming truely similar) Excluding its covered, raised deck

              CA RCN $291,515 to $320,667. (incl 440sf G2) Better stnd quality. Land and site imps $90,000. =$381,515 to $410,667. Since you gave me the SP of $345,000 I’ll play it straight anyway pretend I dont know that and calculate depreciation based on straight-line M&S life expectancy (60) and actual age of 21. -35% depreciation. (A) $291,515 x .65 = $189,485 (+90,000) = 279,485 to (B)[$208,434 + 90,000] = $298,434. Keeping in mind I have no idea what interior quality and components were (possibly another 10% on CA) my CA est is $42k off (low) from actual SP. Missing from your equation was an estimate of accrued depreciation which with 20/20 hindsight is 12.5% of RCN to 20% RCN instead of the arbitrary 35% straight line I applied. Some additional variance simply because I didn’t feel like guessing how big you think a 3 car driveway is; fenciing etc.. As for Q4; C3 they mean NOTHING in terms of correlated RCN source book ratings. I think RCN still has merit as a checks and balance. In this instance, the only missing item (aside from mutually agreed reference class rating) was an accurate representation of your opinion of accrued depreciation (either as a number or a percent). A critical element.

              You win your challenge re $10k proximity to SP. Then again, I can’t imagine an appraiser accepting that challenge outside of a fun exercise, for inclusion in a desk OR hybrid report. You made your CA point (even without the gratuitous insults). FYI Source Craftsman; standard-high quality ($171/sf though it could reasonably have been as low as $125 sf from available data), -0- location adjustment for your zip code and the basement was only $34/sf which given the finishes I personally thought was low. In any case the variables prove your point. Pretty useless without inspection obtained, credible quality, condition and local cost knowledge.

              Frankly, even for insurance purposes, it would not be a valid exercise. They’d have segregated garage; gla and basement more than I did before calculating depreciation.

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  10. Baggins Baggins says:

    http://www.workingre.com/fannie-mae-plans-massive-changes-to-appraisal-process/

    https://www.fanniemae.com/content/news/current-appraiser-newsletter.pdf

    Related. The logic is flawed. Unlike all the other professional services they mention, the on the fly loosely sourced independent ‘inspectors’ without accreditation is an entirely different matter. There is nothing ‘exactly the same’ about it. Name any one of those other mentioned professional service industries appraisers ‘rely on’, whom have 10 per inspection craigs list advertisements… Smart lenders will continue to avoid liability by ignoring both waivers and dumbed down appraisal products. If they tell appraisers that the only work we’ll have access to is strictly desk based form filling, what a nightmare and I will find a new career. I did not get into this line of work so I could be a slave to the desk all day.

    For appraisers who think they can write away for insurance purposes, think again.

    https://valuationmanagementgroup.com/wp-content/uploads/2015/10/Appraisal-Report-and-Data-Delivery-Guide_ver-June-15-2015.pdf

    When the pdf guide is open, then press Control+F for the find feature. Then pop in the word insurance. Then use the down arrow in the find bar to read the instances where the word insurance is used.

    If all we get is the left over high risk work, expect extreme attrition in appraiser populace counts, as well as notably increased insurability fees and eventually notable increases in all appraisal services fees. Then when it’s determined the independent network of hybrid home inspectors are a bunch of morons without real jobs, there will be a new licensing scheme for that line of work. However, it would be like a real real easy break to only inspect homes, then duck out on all questions, all responsibilities, never touch an fnma form again, and punch data entry on a mobile like a trained monkey. I always said if I could avoid all this grueling desk time and only deal with inspections, that would be preferable. I’m more in favor than ever, wind down the gse’s, remove every single bit of their taxpayer backed protections.

    https://www.americanbanker.com/opinion/a-gse-risk-we-can-no-longer-ignore-doing-nothing

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  11. Avatar E J Brown says:

    I agree. The tax payer bail out is ludicrous. I can remember my grandfather, an MD, telling how he lost almost everything when his bank went under during the depression. The only thing he had left was his free & clear real property. He had to start all over.

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  12. Helen Bereznik Grace on Facebook Helen Bereznik Grace on Facebook says:

    My feeling is that they want it only to give it to insurance companies although we make statements that it is not used for insurance purposes

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    • RCN or depreciated RCN? Depreciated RCN does not benefit anyone since in a 100% fire or earthquake that destroys all they would not have enough coverage to rebuild. A face amount policy that is SP less land value would make more sense -even at a higher premium in most areas (but not where LV is high). The lender wants the loan covered and in my state covering the loan would far exceed the improvement value (usually) here we are 70%+- LV. A lender would have to insure the improvements, AND loan payments for the time it takes to rebuild-otherwise they only get a partial loan payoff and a foreclosure of land that has to be razed.

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      • Avatar don says:

        Two choices: Replacement Cost New & Market Value!

        Watch out for Highest & Best use in the market value as the insured value.

        KaiserPermanente built a new hospital on an assembled site, changing the complexion of the whole neighborhood the zoning and the H&B for several duplexes.

        One of the duplexes burned down and it was insured for Market value, it was across the street from the new hospital where demand was for Doctors offices or vacant buildable land. The land value was enhanced because the improvements had been removed by the fire

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Returning to Requiring the Cost Approach

by Dave Towne time to read: 2 min