Did you see and inspect the proposed construction loan you just appraised for???

Understood re training and focus. Unfortunately it’s happening more and more in recent years. I urge all appraisers to take either an Appraisal Institute on the topic or a reputable alternate providers course. Richard Hagar would be worth checking to see if he offers one. (Hagar teaches for OREP). Tim Anderson also has numerous specialized courses. Both are great web-based teachers. Good luck.

Thank you Mike for taking the time to explain. I am new to the industry and while I’ve trained with a 20yr veteran, the CA was not something we focused on. This helps alot.

Hi Evan,

IF done right, CA should not be ‘way off’. Some common errors are:

1. In finding land sales LOTS versus SITES are compared. Then the cost of getting from a subdivided LOT to a buildable SITE is overlooked. If not in your land value, then site improvements such as grading, other drainage measures, utility connections (sewer is often a big one) need to be included as separate entries (marked site imps). These are often underestimated.

2. Does the cost service you use ACCURATELY allow for LOCAL entrepreneurial profit? Some services have been using 15% for decades. I don’t know a single builder that will move ahead with such a small profit. My old mentor (a builder) told me 25% is his minimum expectation; and if he has to use his own money instead of the banks, he wants 50%. Res forms don’t give you a separate line for this like C&I forms do but it is every bit as important.

3. RCN-Quality ratings are often understated too. Read their definitions. Did you use the right quality rating?

4. Total economic life expectancy and depreciation. Are your estimates pragmatic? The old belief of 40 year economic life makes no sense when all the houses around you are 100 years old and renovated many times over the years BUT many NOT in the past 40.

In the end after you double checked, if you are still ‘way off’ then recheck your sales comparison grid. Maybe THAT is whats way off. If not, then just explain that in built our areas (assuming that’s where you are) that oftentimes the as-completed or existing house is worth more than its replacement cost to the market because of delays associated with finding alternative lots and building new; OR absence of available nearby vacant land.

Compare one or two of your land comps with an extracted land indication from one of the comparables you actually used. Your unimproved land sales may well be out of whack.

Good luck. Don’t abandon the CA-or let it frustrate you. It actually works…within certain limitations.

Hello Michael. My lender is requiring CA on an appraisal but my value is way off (really low). I am using DwellingCost.com as my source for replacement cost $. Older home (1960) some updates, 990 sf. Some land sales but land is cheap too. Need suggested verbiage as to why cost approach does not support sales comparison approach. Can you help?

Hello CJK. My lender is requiring CA on an appraisal but the value is way off (really low). Older home, 990 sf. Some land sales but land is cheap too. Need suggested verbiage as to why cost approach does not support sales comparison approach. Can you help?

I’ve always believed the cost approach to be valid. Even when most think it is irrelevant it serves as meaningful warning or checks and balance. RCN = $150. DRCN 50% or $75.00; no functional or external inadequacies noted, then WHY is the sales comparison grid GLA adjustment $50…or $175? NOT that it cannot be, but its an anomaly that clearly needs to be explained.

Same with site value. It may or may not directly relate to the overall price per SF of land, BUT it will also show at a glance how foolish those rote $1; $2 and sometimes $10 SF lot adjustments with no connecting explanation are. For what its worth, the Income Approach even in SFR can often do the same thing.

Regardless of the direct client requirement for the above in all assignments, we have developed three traditional approaches to value over the years. for good reasons. Just because a lender no longer understands why they are important, does not mean that we should not.

What was the cost of the fire?

The Cost Approach is a trailing indicator, recognizable as such. The CA protects the lender that the is enough money to finish construction.
I was recently reviewing ” Home Mortgage Loan Manual” from the American Bankers Association, 1943. it relied on Borrowers back ground, neighborhood and costs.
Have we really advanced enough to rely on a single value approach, where would lenders had to rely on borrowers, bankers, agents, brokers, or even appraisers character.

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

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.

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.

New year New prices?

Greg W., Well said. To always do it is to always see the changes as they are happening

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

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.

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.

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.

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.

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.