Cost Properties
For Cost Properties, the first and obvious challenge is land value.
As to improvement value, an agent can try to argue excessive cost by the appraisal district compared to RS Means or Marshall Swift, but the level of training and knowledge to complete and then explain the process, assumptions, and procedures to an ARB in 3 or 4 minutes is [generally] unrealistic.
Recall, also, that the Tax Code provides a lot of flexibility to appraisal districts’ sources of costs and gives them a lot of latitude in cost variance.
The Point: Unless the agent has very recently completed costs with an AIA (or equivalent) contract and draw schedule, challenging cost new has a VERY low probability of success even if you have the time and expertise. IF you do have detailed costs new, remember to remove the INTANGIBLE costs since they are NOT TAXABLE.
That leaves depreciation.
Most agents and CAD appraisers can name the 3 Categories of Depreciation (physical, functional and external/economic).
But, how many can name the actual 10 specific types of depreciation within the 3 general categories AND FURTHER, articulate the specific methodologies for measuring each specific type of depreciation in the Breakdown Method?
The answer is very few.
IF your try to present and explain the Breakdown Method to an ARB, all you will get is glazed eyes and a verdict of SUSTAIN noticed value.
Save such detailed, extensive analyses for post-ARB appeals and fee appraisals. Spend the time finding 2 or 3 helpful sales or doing an income analysis. Save time and get better results along with lower blood pressure in the interim.
Challenging Appraisal District Depreciation
Absent concrete alternatives, use the CAD’s cost items and cost new. Absent solid evidence to the contrary, consider also using the CAD’s effective age.
Create a side-by-side comparison: CAD depreciation and values versus Marshall Sift depreciation and values based upon the CAD cost new. The CAD won’t challenge their own costs. You save time and effort on arguments you probably won’t win anyway.
One additional consideration: market/economic factors
IAAO recognizes and promotes the use of such factors within certain guidelines. And, many appraisal districts apply such factors. These factors are applied to depreciated costs and can sometimes result in final improvement values 2 or 3 times higher than cost new.
Say what? Yes, 2 to 3 times higher than cost new. It happens frequently across many counties.
CONSIDER:
References to and the use of such market or economic factors DO NOT EXIST in:
- Appraisal Institute courses;
- The Appraisal of Real Estate (Appraisal Institute textbook)
- Texas Property Tax Code (which appraisal districts MUST follow)
- USPAP (which appraisal districts MUST follow)
There is an alternative to the IAAO and assessor use of market/economic factors. Recognized and taught by the Appraisal Institute (and others), the methodology is Depreciation by Abstraction.
This method provides a recognized and proven way to actually measure depreciation in the market using sales comparison and/or income approaches. In fact, given the data of rents and sales provided to appraisal districts, they could easily develop depreciation tables base upon actual market evidence – IF THEY WANTED A MARKET SOLUTION.