Does this sound familiar?
"Cost sets the upper limit of value"
Many appraisers (and underwriters for that matter) believe this to be a true statement. This leads to a belief that the cost approach should come in a bit higher than the sales comparison approach.
There are plenty of myths in our industry and this is one of them.
As we learned in Appraisal 101, cost and value are separate concepts and may or may not be related to one another. Cost is a function of production while value is a function of exchange. As a result, cost can be equal to, greater than and yes, even less than value.
The cost and sales comparison approaches should be treated as separate indicators of value. There is nothing wrong with the cost approach coming in less than the sales comparison approach. Some appraisers that believe in this myth force the cost approach to an amount higher than the sales approach. This biases the cost approach and removes its objectivity and credibility.
Tuesday, April 20, 2010
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It makes complete sense, now if we can only get underwriters to see it this way...
ReplyDeleteI was looking for this information and finally, I found here. I’d like to say thanks for sharing this useful knowledge regarding what does an Real Estate Appraiser do.
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