In our view, an appraisal that excludes one of the approaches to value should be acceptable, provided that the appraisal includes an explanation of why that approach is inapplicable.

In general, all appraisals should comply with the Uniform Standards of Professional Appraisal Practice (USPAP). 12 CFR 323.4(a). The Interagency Appraisal and Evaluation Guidelines explain that those standards require appraisals to “include any approach to value (that is, the cost, income, and sales comparison approaches) that is applicable and necessary to the assignment.” However, appraisals may omit one of those valuation approaches, provided that the appraisal includes the reasons for omitting that approach: “Further, the appraiser should disclose the rationale for the omission of a valuation approach.” 75 Fed. Reg. 77449, 77460 (December 10, 2010).

Also, the FDIC Risk Management Manual of Examination Policies includes helpful guidance on the three valuation approaches and when it might be appropriate to omit an approach. Section 3.2, Other Credit Issues. For example, the FDIC suggests that the cost approach is not as useful for older buildings: “The cost approach is particularly helpful when reviewing draws on construction loans. However, as the property increases in age, both reproduction cost and depreciation become more difficult to estimate.”