Cost Approach – When to Use in Appraisals

Fannie Mae and the Cost Approach

Excerpt: We often receive questions from appraisers regarding Fannie Mae and the cost approach. For example: “I’m appraising a property and have been instructed to comply with Fannie Mae guidelines. I understand that Fannie Mae requires the sales comparison approach, but what if there aren’t enough good comps? Can I use the cost approach as the primary method of valuation?”

Answer: No!

In order to comply with Fannie Mae guidelines, the sales comparison approach must be the primary method used to determine the value. In fact, Fannie Mae will not purchase a mortgage on a property if the cost approach is the primary or only method of valuation used.

Quite simply, if there isn’t enough data for the appraiser to develop a reliable opinion of value by the sales comparison approach, the mortgage will not be marketable to Fannie Mae.

However…

To read more, click here

My comment: I included this article plus the one below, which both address the Cost Approach’s common appraisal questions.

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The Cost Approach: An Underutilized Approach to Value

Excerpt: In residential appraising, the cost approach and the income approach have in many cases become less utilized in favor of sole reliance on the sales comparison approach.

There are occasions when the income approach can be the primary indicator of value for residential properties, such as developments with a high percentage of homes owned by investors.

The fact that Fannie Mae won’t accept reports that rely solely on the cost approach, with a few rare exceptions, doesn’t mean that approach can’t be the primary indicator of value. It just means Fannie Mae won’t buy that loan.

To read more, click here 

My comments: I started with an assessor’s office in the 1970s. At that time, my county was changing from only using the Cost Approach for decades to a sales-based approach. I never liked to use only the Cost Approach when I started doing fee appraisals.

In my area, there are very few land sales. There has not been one for over 20 years in my city. Depreciation is always iffy when appraising Victorian homes built before 1915.

But, I always use the Cost Approach for new construction to determine the financial feasibility of custom homes. I use a few land sales from other cities. If the new proposed home is on a vacant parcel, I go back to when the parcel was purchased, sometimes many years ago, and do a market condition adjustment.

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So Many Appraisal Cost Approach Questions

Appraisal Business Tips 

Humor for Appraisers

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Appraisers: How to Spend Less Time on Email

Appraisers: How to spend less time on Email

Excerpts: Many appraisers report that they’d like to spend less time on email. The task of providing status emails eats up time in the workday and tends to be more complex and time-consuming than typing a quick email reply. Status requests from AMCs typically require you to log in to their system and go through the process of updating the order status on their website. Simple enough, but if you are doing this several times a day for multiple orders, it interrupts your workflow and decreases your productivity.

2. Only check email twice a day, at designated times

Set aside two short time windows for email (15 or 30 minutes each). Do not read or reply to emails outside of those time windows. For the rest of the day, turn off email notifications on your phone, etc., so that incoming emails won’t interrupt your work. You can add a note to your email signature letting people know that they can reach you by phone if they need to get in touch on an urgent matter.

To read all 7 ways, click here

My comments: I regularly write about managing your emails in my monthly newsletter, including getting to Inbox Zero. This blog post is the best I have ever read, as it is specifically for practicing appraisers.

How to Manage Your Email

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VA Approves Desktops and Exterior-Only Appraisals

VA Approves Desktops and Exterior-Only Appraisals

Excerpts from the Summary: On August 1, 2022, the Veterans Affairs released Circular 26-22-13 announcing new procedures for alternative valuation methods, effective immediately.

“The use of a Desktop Appraisal may allow an appraiser from outside the market area, but with appropriate credentials for the jurisdiction of the property, to complete the assignment when no local VA fee panel appraiser is available.”

“Appraisal Assignment Waterfall. With consideration for the high demand for appraisal services and limited availability of appraisers in certain local market areas, VA is providing lenders, servicers, and appraisers with a procedural waterfall that clarifies acceptable valuation methods when certain conditions exist. Lenders and appraisers can also refer to Exhibit A for more information. VA continues to explore opportunities for expanding the use of Exterior-only Appraisals and Desktop Appraisals and will update this procedural waterfall, as appropriate.”

To read the full blog post, click here

The summary and Circular are in the blog post.

To read more about the May 2022 proposal to eliminate the fee panel, click here 

I wrote about the VA in my July 8 email newsletter. To read it, click here

My comments: The big push to cut down on appraisal turn times because of the appraisal shortage is Very Old News since mortgage volume has plummeted. I always recommend VA as the best lender client for appraisers. I wrote about it in the past and interviewed VA employees, appraisers on the VA panel, and appraisers who did not want to do VA appraisals in my paid monthly newsletter.

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Where VA loans are soaring. Are you doing VA appraisals?

Appraisal Business Tips 

Humor for Appraisers

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VA Appraisals and Fee Appraisers

V.A. as a Model for Appraisals

by Isaac Peck

Excerpts:

Step Above the Rest

It’s not a secret that being on the V.A. appraiser roster is a coveted position for most residential appraisers. So, what exactly makes the V.A. so special?

Rocha (V.A. appraiser) says the V.A. is a step above the rest primarily because of the following criteria.

V.A. wants a good quality panel

V.A. pays higher appraisal fees

V.A. delivers fast turn times to veterans

V.A. doesn’t use Appraisal Management Companies (AMCs)

V.A. has a program that encourages the use of trainees

V.A.’s Tidewater Program is fair to all sides

Fees, Turn Time, and Quality

The first four criteria are certainly related and are worth examining together. For starters, the fact that the V.A. does not use AMCs allows them to pay more directly to the appraiser, according to Rocha. “Instead of AMCs, the V.A. has a Portal which is really streamlined and easy for stakeholders to use. We can communicate in that Portal and it sends it out to all parties and keeps everyone in close communication,” says Rocha.

To read more, click here

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Proposal to Eliminate the V.A. Fee Panel

Excerpt: On May 1,8, 2022 the Subcommittee on Economic Opportunity held a legislative hearing on the Discussion Draft of H.R. 7735, Improving Access to the V.A. Home Loan Act of 2022… It would require the V.A. to consider when an appraisal is unnecessary and when a desktop appraisal should be used and, a move from the V.A. Fee Panel to a lender select program. Mortgage Bankers Association advocated for the proposal. Appraisal Institute opposed it.

To read more, click here

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My comments: V.A. is the best lender client for appraisers. You are working for the veteran to be sure they do not overpay, find out about problems, etc. You are not working for a lender who just wants to make the loan.

Where VA loans are soaring. Are you doing VA appraisals?

Appraisal Business Tips 

Humor for Appraisers

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