Thursday, 29 September 2022 | The Latest Buzz for the Appraisal Industry

Depreciated Cost, a Test of Reasonableness

With all of the clamor and excitement that Fannie Mae’s Collateral Underwriter (CU) is creating, we started working on a new article that addresses some possible solutions. In this one, we are expanding a bit on using the cost approach as a means to develop and support some adjustments. Each of the three traditional approaches to value can be used to develop a basis of analysis in any of the approaches. As such, the cost approach can be a reliable means to develop a gross living area adjustment, or lend additional support for it. While it does not work each time, has proven successful for us many times, and as such, we do urge studying it and putting it into your toolbox of solutions for supporting adjustments.

For more great articles by Rachel Massey, Woody Fincham, and Tim Anderson visit their site

Quantitative adjustments require some type of support. CU is not changing anything regarding this premise. Appraisers are supposed to have support within the workfile for adjustments made, and then support the adjustments with commentary within the report. This is in harmony with USPAP. Many appraisers do not address specifics on the adjustments made, let alone explain how they were developed and applied. So here is one method that can be relied on as a means to support a gross living area (GLA) adjustment. Sometimes it can be used for other items.

One aspect of Collateral Underwriter (CU) that many have been discussing concerns price/SF. In the example from the CU webinar, it is stated that if an appraiser is using $15/SF for adjustments regarding gross living area (GLA) adjustments and the comparables sales indicate $200-$300/SF, then it will be probably be flagged as a higher-risk item. So part of the advantage of using this technique will help you address this with analysis. Let us look at some improved sales now that we have an idea of what site values are for the market

Comp 1 Comp 2 Comp 3 Comp 4
Price $             308,300 $           300,000 $           295,000 $           283,000
GLA                  2,414                2,308                2,468                2,310
$/SF $               127.71 $             129.98 $             119.53 $             122.51

In this data set, we have four sales. The range of price/SF is $119.53 to $129.98. The problem with price/SF is that it deals with all attributes of the property. This can be problematic because it is inclusive of the land, which can skew the usefulness of using it as a unit of comparison. Once we get part way through this article, we will start discussing residual improvement value (RIV). RIV can be an effective defense against overall price per square foot concerns. 

Simple Depreciated Cost
We are going to walk through a case study of a file that Rachel worked on recently. Obviously, some things have been changed. Some of you will notice that the data set is anything but like what we all normally see in classroom case studies. Hardly ever do we see perfect sets of data like what often seen in most case studies in an educational offering. With that said, this may not be something to use if you are starting newly in the profession. This article is written with an experienced residential appraiser in mind.

Depreciated cost can be a test of reasonableness for some adjustments, and here it is used as a basis for the gross living area adjustment, tied to sensitivity analysis. It is not meant as a means of arriving at an adjustment, but instead as either a place to start, or a second or third approach. Because each of us have used it extensively we felt it would be a great place to help some of you establish a benchmark or test of reason to use for a gross living area adjustment, in particular as the example is from the real world.

Site Value
Site value – you really need to get a handle on site values for using this approach (while you can use the depreciation factors to get to land values, having a grasp on site values is easier with land sales). Most communities have land sales, even if they are not in the immediate area. For example, this grouping of data presented here was for a property in Michigan and there have not been a great number of land sales in the immediate area over the past few years. There have been no land sales in the subject neighborhood. There were however, enough land sales from competing areas to provide some basis from an opinion of the value of the subject site as if vacant.

The following chart shows seven sites that sold and three acreage parcels:

Sale Sold date Sold price $ To Acquire DOM Size Frontage $/SF $/FF
Comp 1 (Demo) 9/17/2014 $42,050 $51,050 673 13,068 100 $3.91 $510.50
Comp 2 2/8/2013 $67,500 $67,500 52 13,580 97 $4.97 $695.88
Comp 3 9/30/2014 $70,000 $70,000 428 14,442 166 $4.85 $421.69
Comp 4 9/30/2014 $70,000 $70,000 428 16,236 164 $4.31 $426.83
Comp 5 5/31/2013 $80,000 $80,000 2688 17,424 128 $4.59 $625.00
Comp 6 6/27/2013 $71,000 $71,000 51 19,166 127 $3.70 $559.06
Comp 7 9/30/2014 $60,000 $60,000 428 20,000 100 $3.00 $600.00
Acreage Lots
Comp 8-A 2/20/2014 $75,000 $75,000 2237 43,560 148 $1.72 $506.76
Comp 9-A 4/30/2013 $65,000 $65,000 614 43,560 202 $1.49 $321.78
Comp 10-A 10/11/2013 $67,500 $67,500 131 43,560 125 $1.55 $540.00

*Note we included a couple of acreage properties because one of the improved comparable sales was an acre property and support was needed support for a site adjustment.

In the example, we see that the smaller the lot, of course, typically the higher price per square foot (SF). This is known as increasing and decreasing returns; see definition below. While there are exceptions, this is a general rule. Comparable sale-1 is a tear down property. Because the data is actual real world data, it is not perfect as we typically see in many academic examples, but it does allow a supportable conclusion to be derived.

increasing and decreasing returns
The concept that successive increments of one or more agents of production added to fixed amounts of the other agents will enhance income (in dollars, benefits, or amenities) at an increasing rate until a maximum return is reached. Then, income will decrease until the increment to value becomes increasingly less than the value of the added agent or agents; also called law of increasing returns or law of decreasing returns.[1]

With the data shown above, we can see that price/SF averages $4.19 and the range is $3.00 to $4.97/SF in this market. Front footage (FF) averages $548.42/FF and the range is $421.69 to $695.88/FF. By establishing an estimate of land value for the comparables used in the sales analysis, it helps to develop cost-derived adjustment.

Using comparable sale-1 as an example, the estimated cost looks like this:

Element SF $/SF Extension
Dwelling          2,414 $       87.85 $ 212,069.90
Basement          1,142 $       22.17 $     25,318.14
Basement Finished          1,000 $       15.00 $     15,000.00
Extras $     10,000.00
Garage            504 $       27.57 $     13,895.28
Cost New Estimate $     114.45 $ 276,283.32
Sales Price $ 308,300.00
Site Value $ (55,000.00)
Depreciated Value of Improvements (or RIV) $ 253,300.00
Minus Cost New $     22,983.32
Depreciation % 8.32%

Below, we have estimated the site value and subtracted it from each of the comparable sales. The resulting unit of comparison is much better than overall price/SF. The price /SF-RIV can be used as an indicator of the highest possible reasonable adjustment for GLA. We like this as a test of reasonableness for any adjustment made for differences in gross living area. The resulting $/SF-RIV is going to be the upper limit of how much you can adjust.

Sales Sale Price Land Value RIV GLA $/SF-RIV
Comp 1 $308,300 ($55,000) $253,300    2,414 $104.93
Comp 2 $300,000 ($60,000) $240,000    2,308 $103.99
Comp 3 $295,000 ($70,000) $225,000    2,468 $91.17
Comp 4 $283,000 ($50,000) $233,000    2,310 $100.87
What about Fireplaces and Decks, etc. is this approach right for that? Decks and other items like decks and outbuildings typically depreciate at a faster rate than the house. One would try to steer away from using this methodology with such items. We still believe that this approach can be used in measuring the top end of the adjustment range, or as a test of reasonableness, but with the caveat that the rates of depreciation may vary.Depreciated cost may offer one of the only adjustments that you need at all, if your comparable sales are all very similar. It can be difficult to support adjustments for additional features like decks and fireplaces. Sometimes those types of amenities are sometimes best dealt with using qualitative reasoning.   If you are looking at sales that all have similar external features, are of the same quality/condition as the subject it may not be required to adjust for them. These items are difficult to extract and may be summed up with qualitative reasoning. It will depend on what information you have learned about from the market.     This is an excellent area to discuss with real estate agents and ask if such features are strong considerations by buyers. It is also important to understand how the sellers are looking at such items as well.     We find that talking to both agents on a transaction can be beneficial to glean such information.     In the end, if no adjustments are supportable for such amenities, the appraiser can discuss the additional amenities present for a sale and use that in the final weighting during the reconciliation of the sales comparison approach.

We can apply these figures to the improved sales that we are using in the sales approach to get a residual improvement value (RIV). As mentioned earlier, RIV is a better indication of comparability as it allows us to compare apples to apples. It removes the land component, and other improvements not related specifically to the house itself. Just getting this far into the process with each of the comparables, and looking at the RIV/SF as a metric will assist with the concerns many are having about the CU overall price/square foot metric.

The next process is to take each sale and develop a cost approach using Marshall & Swift Residential Cost Handbook (disclaimer, huge fans here) for the appropriate quality. It is important to make adjustments for energy and foundation (bottom of the page related to the type of housing) if they apply, refinements for floor covering, heating and cooling, etc. as well as applying the quarterly multipliers to region and location. From there you should compare total cost to the depreciated remainder for an account of depreciation.

You would then do one for each of the sales in the study.

Sales Cost New RIV Total Depreciation % Depreciated Age Depreciation/yr
Comp 1 $276,283 $253,300 $22,983 8.32% 14 0.59%
Comp 2 $254,908 $240,000 $14,908 5.85% 16 0.37%
Comp 3 $264,925 $225,000 $39,925 15.07% 29 0.52%
Comp 4 $271,585 $233,000 $38,585 14.21% 20 0.71%

*Note: This type of approach utilizes all forms of depreciation. If there were cases of functional or external depreciation present for any of the comparable sales, this would need to be adjusted for as well. In this case, study, there were neither additional forms of depreciation.

This information can be valuable in terms of understanding depreciation, as well as supporting either an age or a condition adjustment (look at how sales 3 and 4, which are older houses, have much more depreciation than the newer houses overall). Since each house is depreciated between ~6 and ~15 percent, you also have supportable adjustments to make for age or condition.

You can also utilize this type of adjustment for amenities such as basements. For example, say comparable sale-1 has a finished basement that is older and not high quality. The finish costs an additional $15 per square foot rounded over and above the cost of the basement. This finish is a recreation room only and the cost new is around $15,000. The overall rate of depreciation for this property is 8.32% or $1,250(rounded). This means that logically the basement finish would now contribute about $13,750 to the property value. That may not be sufficient to stand alone, but does offer a method of support.

Additional support can be from running simple statistics such as isolating a group of sales based on some commonalities. For the following sample, we took houses in this particular market separated between houses built between 1995 and present, but excluding proposed construction. They were further narrowed to include 1,800 to 2,800 SF and no walkout basement. By doing a simple version of grouped paired analysis, we see the result was a difference between $14,843 and $15,377 between the two types, with many having bathrooms in addition to finished rooms. With an indication of $13,750 from comparable sale-1 and the paired group analysis showing a range of $14,800- $15,400, it is easy to deduce a reasonable adjustment amount.

No Walk Out # Sales Avg Price Median Price Avg GLA Med GLA Avg $/SF Median $/SF
1800-2800 SF Unfinished Basement 42 $340,559 $329,623 2392 2402 $142.37 $137.23
1800-2800 SF Finished Basement 89 $355,402 $345,000 2399 2408 $148.15 $143.27
Difference $14,843 $15,377 7 6 $5.77 $6.04

Completing a cost approach on each sale is a good exercise in terms of seeing cost in action, as well as testing depreciation. The greater the depreciation exhibited in the individual sales, the greater the difference in either condition or age, or a combination of both. So this methodology can also create support for other types of adjustments as well, such as the basement finish adjustment shown above. Many will say this takes a lot of time, and our answer is, “Yes, but it’s something that uses some commonsense and appeals to reasonableness”. We would also add that explaining this is much easier than trying to use regression analysis or find that elusive matched paired sales. Most appraisers can reasonably explain cost-based extractions to a jury or licensing board. It does not require much in the way of additional tools. Excel©, cost estimation software and appraisal software is all that is really needed.

Depreciated cost does work in many markets, so give it a try to see if it is something that will work for you. Use it in addition to some other methods of supporting adjustments. We consider it an excellent test of the reasonableness of both the value conclusion, and the elements of comparison within the value conclusion. We have each successfully used it in lending and non-lending work assignments.

Fannie Mae and CU are specifically going to target our size adjustments. In the past, many appraisers used “rules of thumb” as the basis for a size adjustment. As we are all now aware, rules of thumb do not work anymore because CU has the ability to calculate size adjustments from market sales data. The model above, while not based on CU’s sophisticated algorithm, also functions quite well in isolating the sales price of the improvements. Using this model, appraisers are able to isolate such differences within a reasonable range of values. Even more importantly, this range of values is market-derived, thus in full compliance with CU’s requirements. Be sure, too, to save all of these calculations in the workfile for future reference.   Gone are the days when we can justify out adjustments by invoking “my 30-years of appraisal experience”. Now, we must prove our adjustments. This model is one of those proofs. Finally, what we have presented here is nothing new. This well-known method has been published in numerous books and in courses. We thought presenting a “real-world” example might be helpful in showing how even without perfect results; the results can be, nonetheless, meaningful.

[1] Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010)

Have any comments or would you like to submit content of your own? Email

This article was written by Rachel Massey, SRA, AI-RRS and Woody Fincham, SRA with help from Timothy Andersen, MAI, MSc., CDEI, MAA


    1. It isn’t an every time, always works method, but it is reliable. There are plenty of ways to develop land values. Many appraisers say there are no land sales, but I have yet to see a situation where there are absolutely none or rather no way to extract or get a residual land value. This is simply a suggestion for those that are so inclined to try something besides the usual manner they may be used to doing.

      1. That is what I am talking about. We are not all in the same boat regardless of what Fannie and legions of AMCs pretend to believe.

        Take it one step further, the method chosen may, in the mind of the reader, be a far better way to ensure survival than the one suggested in the article. Making your suggestion relatively worthless to that reader.

        What really is needed is for Fannie to give appraisers the data they think is acceptable and those of us who do that secondary residential stuff can then just use the accurate data and “real” analysis and avoid justification for peanuts.

        That beats doing the cost approach for Fannie forms hands down and should make everybody relevant other than AMCs happy.

        1. Edd:
          Thanks for your response. I do not disagree with you at all. Several times in my responses here and also in the article, we discuss that this isn’t for everyone. This is just one method of many.

          The fee levels are low on so much of this work that many of us that do rely on more in-depth analysis must pass on it. I will never fault or look down at someone for feeding their family. In the same vein, lots of reports are written with no support for how anything is done. It is wallpapered together and sent out.

          As far as what Fannie will let us see and use for data: it would be nice but I don’t see it happening anytime soon. they are sitting on a goldmine of data and if they would open it up for purchase I would subscribe.

          1. Until consumers of secondary residential mortgage appraisals value something other than wallpaper appraisal, that is what they will get, CU threats or not.

    1. Sometimes I get much more than that, sometimes less. It really isn’t that hard to do once you get into the groove of doing it.

      1. I doubt very seriously that you get $1000 for a residential appraisal. No one would put that much time into an appraisal, much less for one adjustment, GLA. This is the most ridiculous article I have seen yet.

        1. Matt, I am sorry you feel like we would lie to you. I really have no reason to do so, and I am sure Rachel has no reason to either. I do appreciate you taking the time to comment on our article. I would be happy to invite you to my office to see that I do in fact develop adjustments like this and that I also can develop them in other ways. It’s really not that hard or that time consuming. It does, however, take more time than simply pulling an adjustment out of the air. Enjoy your evening, and all the best to you.

        2. Hi Matt, I am sorry you feel that way. I actually spend a lot of time trying to develop and support my work, as does Woody. This particular method is not as time consuming as it might appear. When you have a chance, give it a try and see how it works for you. As stated at the beginning of the article it won’t work every time but it does work oftentimes. It is also a recognized method and we just tried to walk through it using real world data as we thought it might make it more accessible due to the imperfections of the market.

          Thank you for taking the time to respond.

    2. So you should be doing this on appraisals all the time. This is exactly why FNMA is doing what they’re doing with Collateral Underwriter is because they’re finding appraisers adjustment make no sense and have very little backing beyond what the appraisers opinion is. What @woodyfinchamsra:disqus is doing is an approach all appraisers should have in their suitcase incase it’s needed and should be looked at as something that is a negative or ridiculous. In all reality it would take 10 minutes to get this down and once you get the hang of it it’s fairly simple to just update the numbers and have supported adjustments in every market.

      1. The cost approach where I appraise (99.9% developed with houses built before 1970, hardly ever a land sale) is provided because it has to be provided. It is considered a joke (other than for the rare new construction). You really want to do a cost approach on a 4,000-square-foot 3-story Victorian (what is that functional obsolescence on 3rd floor space, by the way) when there hasn’t been a comparable land sale in the school district in over 10 years? And now you want to do a cost approach on three sales and two listings for no extra fee? Give me a break!
        And more importantly, buyers, sellers and real estate agents don’t even know what the cost approach is where I appraise.

      2. That you would comment on what another appraiser should do to support their appraisal is a disgusting joke. How many times have you been sanctioned by the state for your “credible” reports? And lets not even get started on how your business pays its bills!

        1. One appraisal that I did for new construction years and years ago and all of a sudden I’m the bad guy. Out of the thousands of appraisals I’ve done over many years. And if you look at the findings there was nothing actually wrong with my report, just a difference of opinion. If you’re willing to stick your neck out and write an article about how the industry should be and how appraisers should be treated in context of all the legislation etc I’d be happy to post it and get it published.

      3. “because they’re finding appraisers adjustment make no sense” to idiots.

        FNMA wants us to double our GLA adjustments and yet offer ZERO proof that they are correct. No paired sales, no regression and actually completely contradict appraisers that are in the field actually doing appraisals.

  1. Rachel Massey, SRA, AI-RRS wrote this with me and we had some help from Tim Andersen, MAI. They will be added in tomorrow. My apologies to both.

  2. None of this seems real world to me, and ultimately any way you derive your adjustments it seems to be a judgment call that a good experienced appraiser should be able to make. In 20 years of appraising I have never seen a matched pair that shows what some aspect of a home is worth. We see houses all the time where the adjustments do not fit in real world. Just prior to reading this article I was looking at a matched pair of lake front houses on the same lake one was 7500SF and the other was 4396SF. Guess what the 4396 SF home built in 1996 sold for $875,000 and the 7500SF built in 2006 sold for $860,000 or $15K less than the smaller older home and both appeared to be in similar quality and condition with finished walk out basements. All the regression analysis or any other form of coming up with adjustments get blown out of the water when you do the actual appraisal. People do not buy fireplaces, they do not see small differences in square footage, they look at the house as a whole and decide if they like it better than their other options and if they do then they decide to pay what they decide is worth it. Seller motivation can not be accounted for either as well as many many factors that we may not even take into consideration in the appraisal process. A reviewer or any experienced appraiser should be able to look at an appraisal and determine if the adjustments are in line or if they are not appropriate. A computer should not be able to tell you that your adjustments are out of line because it can not explain why. Buyers and sellers do not sit down and come up with adjustments when they compare houses to one another they only know what they like and don’t like and what they are willing to pay for it overall.

    1. Scott, that’s exactly why CU showed up. The old adage “judgement call” is no longer acceptable. There are ways to extract or synthesize market interaction. There are many, many books and course written on the topic. I agree with your premise that computers cannot do what a human can. There are nuances in any human decision related field that may fall outside of the perspective a computer can utilize. Much of what you write about in your post Falls under qualitative analysis or ranking. That is a great way to reconcile your work. However, Fannie won’t accept it as a stand alone method. Quantitative methodology can start the process and qualitative methodology can help reconcile the remainder. I appreciate your comments and wish you the best.

        1. Matt:
          I am not sure what your point is. If you make a quantitative adjustment you are required to prove how you derived it. That isn’t a Fannie Mae issue, it’s a USPAP issue. If you decide to use , say 15,000 dollars for a bathroom differential, you have to back it up somehow. Whatever number you assign to an adjustment is you stating that I can prove that’s right.

          There are a bevy of methods to use. The point of the article is to show another, often forgotten, method that may hold some relevance to your market. If it’s usable then please do so, if not that’s fine too.

          I appreciate your feedback.

      1. You hit the nail on the head Woody when you said, “judgement call is no longer acceptable. Judgement Calls & Experience go hand in hand. That’s precisely why I left the business. Experience became a commodity of little if any value to the “profession”.

    2. It doesn’t work every time.

      The idea for the article sprung from reading many posts from appraisers expressing frustration with trying to extract adjustments. This is one way (and it is better to use more than one method). It takes less than half hour to do this on the subject and four comparable sales in my experience and is simply part of the tool box if one chooses to use it.

      Our suggestion would be to try it and see how it works. This isn’t new information but instead an example plucked from the market. We thought real world data might be more accessible than text book cases due to the imperfections of the market. Remember we look for support, not irrefutable proof.

      Thank you for your comments.

  3. I agree that depreciated cost can be a useful tool. I have employed it for complex properties where many components of the property have a real world affect on buyer motivation but cannot be easily compared to other properties because of the custom nature of the market but to say “Now, we must prove our adjustments. ” is a fallacy. You have not “proven” anything. You have simply chosen a different estimation.

    Marshall & Swift estimated your actual costs, you estimated the quantity of materials, you estimated the quality of materials, you estimated the labor costs involved and the entrepreneurial incentive. To make an accurate accounting of all these things would take you days and when you are all said and done can you then “prove” to me that this adjustment is the amount that a likely market participant would pay for the item in question. Of course not.

    In the end, you have simply come up with a reasonable estimation of the cost to replace some facet of the improvement and an accounting for how long it may last.

    And, by the way, who made CU the “end-all- be- all” of adjustments? I haven’t had access to their data in order to verify it’s accuracy, have you? Can they prove their adjustments with something other than their own proprietary data? I have no reason to believe that their data and methods are any better than my own. I have spoken with hundreds of home owners and buyers. I have asked them specifically about their motivations. I have heard the same ideas expressed over and over again by people that don’t know one another about what drives value, I have tested those ideas against observations in market data. I know what makes sense to real world people in real world markets, does CU? As far as I understand it, it is an amalgam of every appraisal submitted through their portal.
    Well, haven’t we been discussing for a few years now how many poor appraisals there must be? Is that data not included?

    The answer to all of this is simple. CU and everything like it that will follow is not intended to improve the appraisal process, it’s intended to improve the banking process to which we are a hindrance. The proof… who has access to CU, appraisers or bankers?

    1. You are right on one respect, we can’t prove anything. We can and should support what we use. Reasonableness is key in support. Whatever an appraiser can use that is reasonable and supports the analysis made, then it’s all good.

      In regards to your musings about bankers and CU; this really isn’t the forum for it (I am not saying you are wrong or right). There are all sorts of conspiracy theories about this or that. I can control what I do, and how I do it. CU is simply the sandbox in which residential mortgage appraisers must play in. Many have said they will not do GSE work because of CU, and that is fine for them.

      We were simply trying to offer an alternative way to try and find support. There are so many software companies trying to convince appraisers to buy things they may not need or understand that we wanted to share something that is more inline with the everyday appraiser. Cost is a concept that most appraisers understand. Regression analysis, while a good method sometimes, is not. This is another step in place of the old academic methodology of paired sales. Which is great when you can find them.

      Thanks so much for the comment.

  4. dfabs- You are exactly right no matter how complex of a method you use to come up with your adjustments they are all still estimations. Complex or simple, but still estimations that can be disproved by some one with a differing opinion. Then after all of the figuring in the world is done and you put the #’s to use in real world it skews your adjusted values into a higher range, then you look at the appraisal and say my adjusted values are $100K difference due to the fact that I used a $75/sf adjustment when it appears as though the market is only paying $15/sf difference even though the cost difference is $200/SF. If you bracket all aspects of a property the real world adjustments start to become evident and the fact of the matter is that every home is different, every market is different and most importantly, every buyer and seller are different. What we as appraisers are trying to prove is that there is evidence that the market value for a property is x amount of dollars. I believe it should be a range of value for every home. Does everyone pay the same price for the same car? No. How about everything that is bought and sold. The cell phone I want is $200 at verizon and $80 at costco, and retail price is $500. How much is it worth, can we do a regression analysis to figure it out.

  5. A very informative article! I always look to learn something and this article accomplishes that for me. I find my time is now spent doing just what I dislike the most about my profession, 6 hours of computer facetime. I thrive on the site visits, the measuring, pictures and walking the property. I have now learned to digitize 100% of my work. And I do all of the work my self. I do not have office help, virtual assistants, or subordinates’ to review my work or me to theirs. And my process for a 1004 with all the materials included in the assignment now run about 50 pages (including photos), and take between 6-8 hours from beginning to end. I love fees close to the $400 mark but more often than not am short of that goal.
    Is this the process that most other appraisers take in their day to day business? Or am I missing something in the capital city in South Carolina that others have that I don’t?
    Thanks for what you contribute Woody and Rachel. It takes time and energy to bring something back to the Profession and I want to acknowledge that!

  6. The problem with it is…… can you sell it to an underwriter (who never did an appraisal in her life) or a clerk at an AMC working off a checklist? Depreciated Cost is a worthy tool. It is especially useful in deriving GLA adjustments. So is regression analysis. Life insurance companies have been using RA for years. Life expectancy vs. packs of cigarettes smoked daily, bottles of whiskey consumed, lack of exercise, etc. The left side line is years of life. The bottom line is bad habits. The dots travel stack up in favor of a longer life when bad habits are less. The “x” factor is genetics. This is the same as the qualitative side of appraising. Tech. & math will never recognize it. We all know people who live into their 90’s who indulge in 4 packs daily. That is why CU will be a bust.

  7. Kudos to all of you for educating appraisers to recognize and analyze the data that is available to them and also in directing them to some of the tools they can use. I do have some concerns with your responses to objections based on the time/cost implications of doing what you suggest. The objections are clearly based on the reality that work as a secondary residential mortgage does not pay very well on a per hour basis and your suggestions, if taken, are guaranteed to lower the hourly rate even further. It is time for the industry to come to its senses and universally recognize that the amount of the fee and the turn time required are a critical part of the scope of work and that appraisers in the Fannie part of the world have very little control over or indeed, input into either. Your suggestions are good, but your responses to those who recognize that more work will not get them anywhere except off the CU list are arrogant.

    I recall the comment of an AI instructor years ago when I first realized how aspirational and impractical much of appraising theory is. I complained that clients were not interested in the “right” way and I was told to get better clients. It took years for that to take root and then I figured out that any appraisal work connected to Fannie was never connected to a “good” client, at least not one with the qualities I recognize as good. Many if not most appraisers are just stuck with Fannie and, as Annemieke pointed out to me, appraising for mortgages is their living.

    It is time for those of us who teach appraisal aspirations to recognize the real crises is that those appraisers trapped in the secondary residential mortgage market face enormous challenges and are not well paid. They see CU as a threat to a job that is hardly worth having, but that they need. Please include sensitive and constructive solutions in your responses instead of being oppositional.

    If someone calls your efforts ridiculous, ask why and listen rather than being defensive. If their experiences are different from yours then it is you who have something to learn. If there is anything universally true in the appraisal of real property it is that one size definitely does not fit all and obviously Fannie has never discovered that or is in denial. But then it seems acquiescing to Fannie is a mandatory ingredient in real property appraisal in the US.

    1. Thanks Edd for the kudos.

      Maybe I am coming off as arrogant, and I my apologies if I am. That is certainly not my intent.

    2. Hello Edd, good to hear from you!

      I apologize but I am not sure what you mean about us needing to be sensitive and constructive as opposed to being oppositional? I can assure you neither Woody nor myself would mean to create rancor as our article was meant to be helpful and pose a way of looking at a known method from the real-world perspective.

      1. Woody’s response to those who object on the basis of time/cost was my target. The article stayed above the fray. He says below he doesn’t intend to be arrogant. Good, but all the more reason to say what I said. There is absolutely no room in this profession for anyone to consider themselves superior or to ignore the circumstances that the majority have found themselves in due to the users of appraisals and a lackadaisical industry leadership. I included you by association and hasten to say you have never come across as arrogant that I am aware of.

        The fee squeeze is real and is the largest obstacle to implementation of your suggestions. What the guys doing this cheap work need is the data from Fannie, period. Nothing else comes close to a solution under the circumstances.

        1. Hi Edd, thank you for clarifying. I guess I missed that, but it is probably just his passion speaking.

          In any event, you are right, there is an issue with fee squeeze and I have no good solution. As a fee appraiser, I feel it too!!!! I do think with practice, and a good template in Excel, this can become much easier to do. If you have the cost handbook (not Swift Estimator since that is a charge per run) then it can be done fairly quickly and easily and without added expense. I did one yesterday on an appraisal and believe it took about 20 minutes in total on the comps and maybe five on the subject (other than the land sales).

          That said, yes, everything seems to add up, and when I started appraising over 25-years ago, what we did routinely was so much less than we do now, and the fees were not a whole lot different. Wish I had a solution, but I don’t other than to just stay true to oneself. For me it equals more work and less money and the crazy optimism that someone is going to recognize it and want to hire me 🙂

          1. Yes, we must accept that we are in a calling, particularly those of us who still accept Fannie connected assignments of which I am not one. Every time I get close to one I regret it and in my intense and opinionated way I come across as arrogant and oppositional as opposed to helpful and understanding.
            I’ve been called a crusader and far, far worse so lecturing Woody is nothing that I haven’t heard myself.
            I think we agree that Fannie is a problem, but who cares what I say if the problem weighs me by 800#s.

  8. A couple of things would mention. One a site is not synonyms with land. While access to water and sewer might be readily available in some areas, more often than not in my area private systems have to be created.

    Note: Marshall & Swift cost estimate does not include the cost of creating a well and septic system only hooking up to two such systems. So in rural areas there can be a
    large difference between vacant land value and site value.

    This can skew your extracted site value contribution and your estimate of contributory value of your improvements.

    While I on the subject, sales prices of land will vary based on estimated cost of excavating the site… The appraiser should develop a good understand the cause and effect to sales prices topography has. The appraiser should learn how to judge concerns like ledge potential or high water tables. The risk of extra cost associated with such concerns is also important. Dept of Environmental Protection can also add cost on water front properties so again be aware that vacant land sales are not always a good indicator of site value.

    One could argue that cost set the upper range of value, additional argument could be made that there should be some consistency depreciated value of the improvements and value indicated for elements of comparison in the sales approach. If both were done correctly…

    My point would be if you utilizing the cost approach on a regular basis and understand it as it relates to the specific markets and submarkets before you start adopting any changes in your sales approach because of some cost figure you derived…

  9. Dang know-it-all SRAs. The Appraisal Institute makes them do a demo report and look what happens. They start publishing long technical articles with which to pad thier resume’s. (grin)

    I think the CU issue is moot at this point. Fannie issued a clarification letter recently stating that lenders were NOT allowed to pass along CU flags, data, screenshots AT ALL. And
    that they (Fannie) would be actively policing this sort of activity. In other words, it’s for internal use only. If a lender’s qualified review staff wants clarification on something in your report they must communicate with you in thier own words, not CU findings. I doubt many lenders or AMCs will be willing to staff up and train CU qualified review appraisers.

    Based on this it is my opinion that CU will, for the most part, be relegated to a tool to be used only when necessary and not a club with which to beat up all appraisers and play them against one another.

    1. EXCELLENT! Every appraisal should be a demo report to this guy. Sorry, but until fees are $1,000, it’s not going to happen. And Fannie Mae should focus on credit quality, not that you called a house C3 while 85% of the appraisers called it C4.

  10. Interesting article. In the “old days” the cost approach was routinely used in residential appraising and most appraisers would have been attuned and accepting of this method, to some extent. The problem was that there was somewhat of a disconnect between the cost approach and the sales comparison approach adjustments.
    One time I went through an analysis of this type on basement finish adjustment years ago at an appraisal meeting. The only problem was that, at the end, I surveyed the appraisers present and not one of them even remotely used an adjustment in the sales comparison approach similar to what the cost approach might indicate. All used an adjustment of at least 50% less. Even today, there are many well respected appraisers who are very accurate appraisers using $20 per square foot for their size adjustment. So are they wrong?
    CU has brought up some very interesting discussions, but there is fundamentally a contest going on for the soul of the profession. Traditionally, appraisers decided what appraisal was. Now, many very smart but non-appraisers are saying that just isn’t good enough. They want issues they are concerned about addressed and incorporated into what appraisers do and they are not about to take “no” for an answer. Maybe appraising should be fundamentally different and we need new kinds of appraisers, but so far I don’t think anyone has proven that these new methods are consistently more accurate on a national basis, no matter how much “sense” they make to non-appraisers.
    Maybe the first thing that should be done to improve appraising is to get appraisers out of the picture and let very smart non-appraisers control what is required and what should be relied upon. Certainly that argument is made about science (too important to be left to the scientists). So far, I’m not convinced.

  11. You don’t have to prove your adjustments, you just have to support them. The use of depreciated cost as a method to support your adjustments is worthwhile and reasonable in some cases, and not in other cases.


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