The Cost Approach - Appraiser Compliance Issues

Guest Blogger, Bert Craytor, Certified Residential Appraiser http://www.PacificVistaNet.com addresses some of the issues of providing the Cost Approach to lenders, in residential appraisal reports, where it's known that the intended use is to support an estimate of insurable value: "Insurable Value" is defined by the respective insurance company and is probably outside the domain of many real estate appraisers; i.e. the typical appraiser should not be concerned with estimating "insurable value". However, insurable value is often BASED on "replacement cost" or reproduction cost". And if the client's definition of "replacement value" or, as the case may be, "reproduction cost" matches that of the appraisal profession, then the client should certainly expect a credible value from the appraiser. I think therefore, that if an appraiser loses a suit with respect to insurable value, then it is probably because his method of calculating replacement or reproduction cost according to accepted appraisal standards is faulty. In this regard, page 162 of Eaton's "Real Estate Valuation in Litigation" sheds some light on the problems involved: "Appraisers must avoid representing themselves to the trier of fact as both 'expert appraisers' and 'expert cost estimators'. In a Rhode Island case an appraiser was precluded from testifying to the cost of replacing a portion of a fence taken in an eminent domain action when the court ruled that being an expert appraiser does not necessarily qualify the appraiser as an expert fence builder." (Palazzolo v Rayhill, 394 A.2d 690, R.I. 1978)." "...If the Cost Approach is important to the appraiser's value conclusion, the appraiser is well advised to obtain a reproduction or replacement cost estimate from at least one contractor. To supplement the contractor's cost estimate, the appraiser should develop at least one other cost estimate or use one developed by a cost service. If the appraiser adopts the contractor's estimate with no other evidence, the estimate is not the opinion of the appraiser, but of the contractor. In such a circumstance, the appraiser could be excluded from testifying in regard to the cost of the improvements because the estimate is not the appraiser's opinion and therefore, hearsay evidence. ..." "The problem of hearsay can also arise if an appraiser uses a published cost service as the sole source of data. Aside from the hearsay rule, using a cost service as the sole source of data in estimating reproduction cost has been viewed with skepticism by some courts." It would certainly be advisable to give a clear definition of "replacement cost" and "reproduction cost" in the Cost Approach. Also, as part of the Scope of Work, the appraiser should make an attempt to get the client's definition of replacement/reproduction cost - if the client requests the Cost Approach. Of course, that might create some problems. Bert Craytor Certified Residential Appraiser http://www.PacificVistaNet.com Additional Resources:

• The Cost Approach and the Fannie Mae Form 1004
• Including An "Unreliable Approach" to value.
• The Cost Approach - To Do or Not To Do?

If you enjoyed this post, subscribe and get FREE updates! Appraisal , Real Estate , Appraiser , Scope of Work