How can this be?
Only One? USPAP says there are three approaches. Licensing classes are organized around three approaches. There used to be “eight methods,” (Frederick Babcock, 1924), then seven (1932), then three (1960). Is it time for ONE approach?
Perhaps the most important lesson today, to learn from the Babcock history, was his belief. “He was critical of appraisals that never considered modified approaches to value based on the information available.”[1]
So what is the information available today? What might have Frederick have said about today’s instant, complete data?
I suspect he would have again said that the method should consider the information available.
Cookbook Appraisals
He also (per the Miller-Markoysan article) argued against “what he called cookbook appraisals.” Would he have he argued against a cookbook three comps or six comps as being “enough”? Or would he have argued that more information is better than less information?
Along these lines, let’s take a quick look at the usefulness of the three approaches in most developed, urban areas. The cost approach is most useful when a building is very new, or is very old. Very new, because improvement cost figures can be reliable, and depreciation is clear to reckon. Very old, because the appraisal is mostly land value. In between, the cost approach depends on the sales comparison to get any sense of depreciation. It is derived.
The income approach depends on the estimate of income flow. Income itself is actually a composite variable, which is a function of several other variables. The other variables are all related to the underlying property type, value measure, time, location, and features. (The same features identified in the sales comparison approach).
Both the income approach and the cost approach depend on market information. This also was an emphasis of Babcock. He argued “the importance of selecting the proper method given the purpose of a particular appraisal.” “Market price, which is based on a selling price, is a fact while value must be defined.” (This argues for a redefinition of our over exuberant use of “market value” as being equivalent to market price.)
Given that all three “approaches” depend on the underlying market prices of “similar” “competitive” “comparable” properties, it appears that a data science viewpoint might best employ the full integration of how the three approaches help each other.
Full integration can:
- Eliminate the “inbreeding” of information used more than once.
- Weight the reliability of each piece of information rationally.
- Remove yet another element of subjectivity in appraisal – the “reconciliation.”
I would conclude that the choice of approach is dependent on the purpose of the appraisal, and the availability of information. If it is a goal of the profession to move to better reliability, reproducibility, and understandability – an integration of approaches may be necessary.
Objective results can only come from objective methods, objective data, and reproducible work.
[1] Miller and Markosyan, The Appraisal Journal, April 2003, 71:2
November 8, 2017 @ 5:50 am
Please; any critical thinker over the age of 40 would have recognized this years ago. Every approach uses the same value equation: Value = # of units X value per unit with the only difference being how you get to value per unit. Cost: Dep, Cost per Unit (Same as Sales because Dep. is Market Abstracted) X # of units. Income: IRV (nuff said) Sales: Sales are sales and should establish EVERYTHING; reasoning, trends etc. And the only way the Sales or Income Approach will vary is either improper selection of the cap rate, usually due to invent a rate (band of investment), or a leased fee interest affecting value. So tell me again what is so novel about this? Oh, I know, no one bothered until now to waste space in a trade journal published by a dying organization to write an article about something that to any “critical’ thinker”, was obvious. Don’t even get me started on regression, the lack of discernment between independent and dependent variables and exclusive use of percentage adjustments, because “critical thinkers” already know, they do it wrong and nobody cares.
Bob Bogner, Former MAI
I stopped paying dues when they stopped being a professional organization
November 8, 2017 @ 11:31 am
That is exactly what Mr. DeWeese said, each of the methods are ‘polluted’ by inputs from other market sources so there cannot be a truly independent approach to value apart from an amalgam of the three values foisted upon us by the forms and lender’s requirement for their own risk management.
One Approach that was common during the 1930s and 1940s when movie theaters were in vogue was “Value in Use” which was also used for clubhouses and churches. Of course, an auditorium, movie theater, or church sanctuary that could seat upwards of 2,000 people would exhibit its own economic obsolescence when the building was less than full to capacity on a regular basis. Highest and Best Use would then call for the building or land to be put to a different and/or better use.
I was a construction professional for almost 30 years so the “Break-Down” method of accrued depreciation is not a problem at all. Still, when employing the Extraction Method, I am back to the market place and simply looking at the Subject’s ‘value’ from a different angle. So the approaches are angles from which the property is viewed. I suppose that three angles are necessary for the lender to gain a proper ‘perspective’ for examining the Subject.
November 11, 2017 @ 1:36 pm
I’ve always liked Gene Dilmore’s take on the 3 approaches dogma. He noted: “The basic logic of the ‘three approaches’ was stated most succinctly in the old saw: ‘I’ve said it once; I’ve said it twice; when I say it three times it will be true.’… Do not strain the intelligent client’s credulity by pretending to correlate three entirely [different] valuation processes; you have made one appraisal, not three, and professional integrity demands that you–simply and honestly–present that appraisal in such a manner as competently to guide the client’s decision-making policy.” (Gene Dilmore, The New Approach to Real Estate Appraising (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1971)
I’m guessing if Gene were alive today, he would support George’s integration argument.
November 12, 2017 @ 10:27 am
It is true that all approaches to value are market related. It is simply NOT true to say there is only one approach. Anyone who would say that would tell a cop at a murder scene to only use one method of looking at the evidence. Each approach is simply a different way of analyzing market information. The income approach is not “polluted” by the sales comparison approach, it is the way income, or the possibility of income, impacts the hypothetical consummation of the sale. In addition to any of the applicable three approaches, the appraiser should consider and use any explainable bit of data that helps come to a credible opinion. To do less is shortchanging your client and, unless fully explained (you are allowed to shorten the SOW so long as the client agrees to less information and, possibly, a less reliable outcome), amounts to appraisal mal-practice.
November 12, 2017 @ 11:45 am
I used the term the instructor used in the Advanced Sales Comparison class I was enrolled in. His point was that, just as you had said, that the approach was not independent of the rest of the process but should be considered as part of the motivational factors that would be involved in the purchase of the property at the value the appraiser had estimated.
I had a nice chat with Scott Davidson ASA about this and he pointed out that the approaches should only be used where an active market for the approach exists. The validity of the inclusion of the approach is that it addresses consideration that the market regards as a salient factor in the property’s value.
In my residential appraisal work I question the client’s demand that I complete the cost approach for a single family home as the cost of the improvements new is not a consideration in the mind of the buyer unless the property was recently remodeled or added on to with additional living area. But then again, if the client is willing to pay for it the client must feel there is a reason for the approach that makes its inclusion in the report necessary.