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
Wednesday, April 7, 2010
What the bifurcation is going on too?
Continued from the previous post
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In the end I was quite comfortable that the market value coincided with the contract price.
In my research I found that buyers were paying premiums for owner sales and in many cases paying more for an older and smaller improvement when larger and newer homes were available due to foreclosure. The reasoning came to greater perceived risk when buying a bank owned home. Banks often provide few to no assurrances or warrantees regarding the land, improvements and title. Buyers are on their own.
This market prefernce resulted in two sub-markets among properties that otherwise appear to be competitive. The nicer and larger bank owned properties were not viewed as true substitutes. They sell at a significant discount that better reflects liquidation value rather market value. Thus, making an upwards condition of sale adjustment to the bank owned sales was appropriate.
I have to admit it was fun to see this market nuance as it ultimately provided the support for the subjects purchase price.
But as it goes no good deed goes unpunished. In spite of the purchase price being supported, the underwriter hated the report due to the large adjustments used to account for the market differences and called to have a new appraisal performed.
Cheers! =)
___________________________
In the end I was quite comfortable that the market value coincided with the contract price.
In my research I found that buyers were paying premiums for owner sales and in many cases paying more for an older and smaller improvement when larger and newer homes were available due to foreclosure. The reasoning came to greater perceived risk when buying a bank owned home. Banks often provide few to no assurrances or warrantees regarding the land, improvements and title. Buyers are on their own.
This market prefernce resulted in two sub-markets among properties that otherwise appear to be competitive. The nicer and larger bank owned properties were not viewed as true substitutes. They sell at a significant discount that better reflects liquidation value rather market value. Thus, making an upwards condition of sale adjustment to the bank owned sales was appropriate.
I have to admit it was fun to see this market nuance as it ultimately provided the support for the subjects purchase price.
But as it goes no good deed goes unpunished. In spite of the purchase price being supported, the underwriter hated the report due to the large adjustments used to account for the market differences and called to have a new appraisal performed.
Cheers! =)
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