USPAP’s Useless Cost Approach> – TAA Podcast 089

USPAP’s useless cost approach.  It is hard to learn.  Depreciation is too hard to calculate.  The market does not use it.  My peers do not use it.  So, yes, its useless.  Or is it?  If you listen to this entire podcast, you may have reason to change your mind.  But why?

USPAP’s useless cost approach?  If you look closely, the beauty of the cost approach is not in its ability to indicate a value to a parcel of real property.  Instead, its beauty is an an analytical tool.  But, you rightly ask, what is it capable of analyzing?  What else can it tell me other than the value of the property via its protocols?  Our friends at the GSEs and AMCs have snookered us.  They are so set on getting an appraisal in 24-hours.  It is possible, they seductively whisper, to turn appraisals around in the impossible time limit if you ignore both the income and cost approaches.  Yet the income approach can be very adept at telling you what the property’s highest and best use is NOT.  As for the cost approach, its analytics can tell us the highest and best use of the site as if vacant, as well as its value as improved.  It is very good at extracting depreciation from the market so our adjustments for age & condition are market supported.  And it is about the only way to market-extract a market-supported estimate of effective age.

USPAP’s useless cost approach is really not useless.  With some study and practice you can make it a formidable weapon in your arsenal of appraisal skills.