There is Only ONE Approach to Value

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