TRIGGER WARNING: If images or discussions of M203 grenade launchers scare you, please stop reading now.
The truth is, most appraisers don’t like the cost approach. ‘Hate’ might be too strong a word but I have a strong dislike for it. As with any occupation, appraisers are paid to produce. We write appraisals, send them to the client, and get paid. At least that’s the idea. The cost approach often requires land sales which requires more time, which slows down our production. And in most cases, it isn’t even necessary to produce a credible opinion of value. That’s a fact.
However, the cost approach is very relevant for newly constructed improvements or special property types, assuming a balanced market. It also serves as a very, very powerful tool in our arsenal, much like the M203 grenade launcher in this scene in Scarface.
Case in point.
I recently appraised a vacant special purpose building in Indiana that was under contract to be sold for $1.5 million dollars. The building was 10 or 15 years old and the prospective purchaser was a novice in operating businesses that normally occupy similar buildings. The cost approach indicated that a new building with the same utility could be constructed on a nearby site for $1.2 million dollars.
Faced with the prospect of explaining our opinion of value, I introduced the client to the irrefutable logic that a typically informed purchaser would not purchase a building for $1.5 million when a newer building could be constructed across the street for much less money. In this particular case, the lender was putting their own money at risk and appreciated our integrity. What happened with the broker? They unfriended me on Facebook.
Have you had similar cases?
The
Great article, as usual. There’s a question waiting for you on Facebook.
Thanks Wyatt!
All I know is that I want one of those grenade launchers, lol!!
Good insight my friend! I always enjoy reading your posts. I haven’t had an instance where I’ve been able to do that. But I have, on a few occasions, used the purchase (less land) vs RCN to extract economic lives based on the depreciation percentage. Requires lots of linear assumptions, but it’s better than nothing when there’s no true “concrete” evidence in the market.
Have a great weekend man!
Thanks for the comment, Alan. You have a great weekend too, my friend!
Russell – really enjoying your blog. Glad the cost approach after adjusting for age is in your arsenal. The others articles are also insightful. Your child will be a special addition to our prayer requests. We have multiple cases and at least realize the special circumstances surrounding each. Bob
Thank you, Mr. Richter.