View Full Version : Why are the cost from Marshall & Swift so low?


SunbeltAppraisals
08-09-2010, 12:12 PM
Why are the cost from Marshall & Swift so low?

According to some builder friends, home cant be contructed for those cost.


Thank you!!

panappr
08-09-2010, 12:15 PM
Same issue here in Los Angeles..... Local builders claim 20-25% low. M/S claims you can add a contingency due to fluctuating costs, isn't that their job? :shrug:

Peter LeQuire
08-09-2010, 12:16 PM
1.) Builders always say that.

2.) Builders think in terms of package costs.

3.) Builders always say that.

CANative
08-09-2010, 12:16 PM
Costs are very local and M&S local modifiers are not. Costs can changed from day to day or week to week. Costs do no include entrepreneurial incentive and how EI is added depends on the builders point of view. If the builder is also the developer then then the M&S costs are going to look low because they are including it in their costs and M&S isn't.

Caligirl
08-09-2010, 12:18 PM
In my experience as a homeowner M&S is running around +/-30% below actuals.

CANative
08-09-2010, 12:23 PM
Residential cost approaches are caca because they're meaningless.

Elliott
08-09-2010, 12:29 PM
Why M&S so low, because you didn't intergrate it to your local market?
Its only a relative cost curve forumula. It doesn't work out of the box.

CANative
08-09-2010, 12:34 PM
Agree with Elliot. And if M&S is wrong then the appraiser should use local builder costs... if they expect some credibility for a cost approach.

M&S is about 80% low for areas along the Sonoma and Mendocino coasts.

Pilgrum
08-09-2010, 12:44 PM
Residential cost approaches are caca because they're meaningless.

I agree. Especially in light of the current economic situation.
Costs for labor and materials have not declined. And permit and other costs charged by the municipalities have gone up. Only site costs have declined at a rate approaching home sale prices.
Also it seems to me that many appraisers try awfully hard to get the Cost Approach at, or near, the value indicated by the sales approach. Why?

CANative
08-09-2010, 12:50 PM
Also it seems to me that many appraisers try awfully hard to get the Cost Approach at, or near, the value indicated by the sales approach. Why?

a) they were improperly trained and didn't bother to get additional and necessary education;

b) they don't want to go through the painful process of reconciling and explaining why it is different;

c) they don't understanding the reasons and meaning when the two approaches vary significantly.

George Hatch
08-09-2010, 12:51 PM
The first thing to recognize is that the "cost" number in the cost approach section of the Fannie forms is an aggregate number that includes all costs and profit/loss margins, whereas the base costs in M&S reflect fewer items. You have to add a lot of items to those base costs just to reflect the items most homes have, like flooring and kitchen appliances and fireplaces. That's not to mention the size and shape multipliers.

M&S also notoriously undercounts local indirect costs like fees and permit costs for some of the metro areas. The last I heard, local fees and permits in my region average about $40,000 per unit whereas M&S uses a national average that is less than $10,000. M&S also uses an arbitrary developer profit margin of something like 12% - that works a whole lot better in some areas than others, and it works a lot differently depending on when during an economic cycle you're hitting it. When times are good the typical developer profit margin is a LOT more than 12%, whereas during bad times it can drop below zero to represent a net loss to the developer.

You can complain about M&S not doing your job for you all you want, or you can recognize what their limitations are and proceed from there. It's just like any other source of data out there - none of them are perfect.

CANative
08-09-2010, 12:54 PM
That seems like too much work and research for appraisers doing AMC appraisals for a buck and a half each.

George Ellerman
08-09-2010, 01:00 PM
I've generally found the cost approach to be largely meaningless due to varying regional cost factors that M/S can't possibly factor for in today's volatile economic climates. Your local "Joe the Contactor" is going to beat M/S in 90% of the cases in determining actual cost. Also,IMO, if the house is over 5-10 years old the problems with determining depreciation make any cost approach highly suspect.:)

SunbeltAppraisals
08-09-2010, 01:07 PM
For appraisers who use the cost approach, do you include economic instabitlity as external depreciation?

CANative
08-09-2010, 01:10 PM
For appraisers who use the cost approach, do you include economic instabitlity as external depreciation?

If it effects the housing market, then yes. BTW... it's external (or economic) obsolesence (which results in depreciation).

Tim Hicks (Texas)
08-09-2010, 01:15 PM
The Marshall & Swift is dead on this area...sorry!

Like George said, you need to develop a full cost approach. I wonder what percentage of appraisers actually know how to do a Marshall & Swift 1007 cost form? Also, here is TX the EI, EP and general BS from builders is not as ridiculous as it is in some areas. We are the land of cheap real estate.

CANative
08-09-2010, 01:21 PM
Your area is stable and development risk is low so EP and EI is so low it gets absorbed and hidden in the market noise and margins of error in doing cost approaches.

Including EI as a line item of cost is not "necessary" but it is more technically correct to do so.

SunbeltAppraisals
08-09-2010, 03:04 PM
EI = External inadequacy?

David Mescon
08-09-2010, 03:06 PM
Costs are very local and M&S local modifiers are not. Costs can changed from day to day or week to week. Costs do no include entrepreneurial incentive and how EI is added depends on the builders point of view. If the builder is also the developer then then the M&S costs are going to look low because they are including it in their costs and M&S isn't.

Ditto that.

David Mescon
08-09-2010, 03:07 PM
The first thing to recognize is that the "cost" number in the cost approach section of the Fannie forms is an aggregate number that includes all costs and profit/loss margins, whereas the base costs in M&S reflect fewer items. You have to add a lot of items to those base costs just to reflect the items most homes have, like flooring and kitchen appliances and fireplaces. That's not to mention the size and shape multipliers.

M&S also notoriously undercounts local indirect costs like fees and permit costs for some of the metro areas. The last I heard, local fees and permits in my region average about $40,000 per unit whereas M&S uses a national average that is less than $10,000. M&S also uses an arbitrary developer profit margin of something like 12% - that works a whole lot better in some areas than others, and it works a lot differently depending on when during an economic cycle you're hitting it. When times are good the typical developer profit margin is a LOT more than 12%, whereas during bad times it can drop below zero to represent a net loss to the developer.

You can complain about M&S not doing your job for you all you want, or you can recognize what their limitations are and proceed from there. It's just like any other source of data out there - none of them are perfect.

See above. M&S includes contractor's profit but not developer's profit.

KenAZ
08-09-2010, 05:59 PM
EI = External inadequacy?

Oh great, another Cost Approach Thread . . . .

It is actually Economic Obsolesence. You can include it near the bottom of the Cost Approach on the 1004. The only way to figure it out is to calculate the cost and subtract the value from the Sales Comparison Approach.

I have more experience with the Cost Approach than 99.9% of appraisers, and I know it is garbage. As we learn in Appraiser 101, Cost does not equal value.

The real Cost Approach (Not M&S) is useful to help us predict the future value trend. If a new home costs $100 per sf to build, but current homes are selling for $50 per sf, then we know that at some point, the values will creep up to the costs. This does not mean that values are going up or down. Values could be declining, or stable, but eventually will go higher. No one knows when that will happen.

It could be tomorrow, it could be 10 years from now.

M&S is a good way to CYA, but it is not an accurate indicator of actual costs.

John Hassler
08-09-2010, 07:19 PM
M&S includes contractor's profit but not developer's profit.Also missing from M & S is carrying costs (or the value of loss of use of funds) while development takes place, and the EI related to the cost of the land itself - a $300,000 home on a $300,000 lot needs more net profit incentive to develop than a $300,000 home on a $50,000 lot.

CANative
08-09-2010, 07:22 PM
EI = External inadequacy?

Entrepreneurial Incentive (versus Entrepreneurial Profit).

David Mescon
08-09-2010, 07:38 PM
Also missing from M & S is carrying costs (or the value of loss of use of funds) while development takes place, and the EI related to the cost of the land itself - a $300,000 home on a $300,000 lot needs more net profit incentive to develop than a $300,000 home on a $50,000 lot.

Soft costs? How do ya even know you've got soft costs, huh??? :rof:

Riick
08-09-2010, 09:15 PM
Cost approach was considered but not used as it is inaccurate for anything other than recently built homes; In addition, in current marketplace, cost has little to do with market value.

Terrel L. Shields
08-09-2010, 10:26 PM
M&S is about 80% low for areas along the Sonoma and Mendocino coasts.permits and soft costs are high and builders just charge more because they can...people like to pay more than something is worth just to show off to their buddies...like owning a Rolex that breaks just as often as a timex and keeps no better time....but it is a Rolex.

too much work and research for appraisers doing AMC appraisals for a buck and a half each.great value added service to require of clients...why not? I don't want to do AMC work anyway.

For appraisers who use the cost approach, do you include economic instabitlity as external depreciation?External market conditions are extremely important to the value and basically arbitrages the gap between actual depreciated costs and sales... do it to the comps and see.

M&S includes contractor's profit but not developer's profit.In many areas, particularly those with onerous regulation and zoning, the cost of permits, land prep, and the profit of the developer is huge. In rural areas where I live it is often virtually zero. In those areas, there are almost no "developer's profit" nor fees and the M & S costs can be fairly close without adjustment.

Entrepreneurial Incentive (versus Entrepreneurial Profit).In the "sales is everything" positive economics viewpoint it is obvious a lot of the cost "schooling" was overlooked.

CANative
08-10-2010, 10:38 AM
Terrell...

On the Mendo Coast there are only a small number of builders skilled, dependable labor is hard to come by and harder to keep on the job. Everything is a two or three hour drive to the developed communities and then a building site may be an hour from that. Costs are in the $300 to $400 per square foot range.

In the "sales is everything" positive economics viewpoint it is obvious a lot of the cost "schooling" was overlooked.

What's that supposed to mean? The two terms mean different things.

great value added service to require of clients...why not?

The cost approach on older houses in built out neighborhoods should be confined to the research necessary to support the rationale for the HBU opinion and then kept in the work file.

The cost approach is just as difficult as any other approach and in some cases it is more difficult. But it is not rocket surgery and I know it as well as any one else. Maybe better than some.

Mike Boyd
08-10-2010, 11:00 AM
Building permit costs. In my market area, building permit and related fees can run as high as $45,000 for a typical home. Add water connection fees, sewer connection fees, sidewalks, curbs, gutters and driveway approaches. There may be a charge for a fireplug, also. Some electric companies charge for the service drop and ALL charge for the costs of underground service. Don't forget site prep costs. Also, when completing the cost approach if you're in a declining market, deduct for economic obsolesence. Improvment bonds might also be a factor.

CANative
08-10-2010, 11:18 AM
Some electric companies charge for the service drop and ALL charge for the costs of underground service.

PG&E charges about $8,000 just to get the engineering paperwork done. Actual costs of installation are on top of that.

DMZwerg
08-10-2010, 12:50 PM
Terrell...

On the Mendo Coast there are only a small number of builders skilled, dependable labor is hard to come by and harder to keep on the job. Everything is a two or three hour drive to the developed communities and then a building site may be an hour from that. Costs are in the $300 to $400 per square foot range.


Well, it would tend to make sense that one source is not going to be equally correct everywhere in the nation despite attempts at regional and local adjustments. Materials, labor, and so on all contribute and things can shift suddenly but take years to show up on the national radar.


So, why is M&S so low?
Well, it may just be where you are located, etc. If you have better sources then by all means use them.


The cost approach is just as difficult as any other approach and in some cases it is more difficult.

Yep.
I would also add that for some markets / uses it is simpler and more dependable than others. Just like income approach becomes more dependable as one moves away from the SFR markets that are often highly tied to other reasons to purchase rather than renting , then past 4 family into apartment buildings (where it is usually THE method), the cost approach likewise may not be universally as applicable or reliable.

CANative
08-10-2010, 12:54 PM
Relying on one data source is not responsible. Many markets move faster than a national cost publication can keep up with. I find that for most "regular" areas the cost calculator at building-cost.net works well and is easier to use than M&S. It's "good enough" for a mortgage appraisal cost approach.

CANative
08-10-2010, 12:57 PM
the cost approach likewise may not be universally as applicable or reliable.

Unlike the sales and income approaches, the cost approach is always applicable.

DMZwerg
08-10-2010, 01:22 PM
Unlike the sales and income approaches, the cost approach is always applicable.

"... and reliable."

The "and reliable" is important as well. As depreciation rates increase the approach becomes increasingly subjective. How must is the external obsolescence? The effective age? Estimated remaining economic life? Functional utility (including mixed due to additions)? etc?

In many (dare I say "most") cases the SCA is a more reliable indicator of SFR market value than the CA or IA. Doesn't mean the CA has no applicability, just that it may be less reliable as multiple extractions and reapplications occur in estimating depreciation. :peace:

CANative
08-10-2010, 01:55 PM
Appraisers go for credible, not reliable. I think reliable is applicable to clients.:)

George Hatch
08-10-2010, 03:07 PM
Unlike the sales and income approaches, the cost approach is always applicable.

There are exceeding few applicable "always" in our business. Inasmuch as real property appraisers appraise property rights and some of those property rights cannot be valued via cost, I'd have to back DMZ on this one.

CANative
08-10-2010, 03:14 PM
I was just trying to get people off my back who thinking I'm a cost approach denier. And I was referring to improved properties since the thread title is Marshall & Swift.

Tim Hicks (Texas)
08-10-2010, 05:03 PM
Relying on one data source is not responsible. Many markets move faster than a national cost publication can keep up with. I find that for most "regular" areas the cost calculator at building-cost.net works well and is easier to use than M&S. It's "good enough" for a mortgage appraisal cost approach.

Its too high in this area.:rof:

CANative
08-10-2010, 05:40 PM
Its too high in this area.:rof:

:rof::rof:

Mztk1
08-11-2010, 12:03 PM
Suncoast, I appraise your area, and the M&S isn't too low for me unless I am over-appraising the property. These days, it is usually too high.

You have to chose the right quality rating. You have to start with the base price and work your way through the bottom of that page, and then turn to the back of the section for materials used, the garage and porches. If the materials aren't there, like you have a house with high end marble flooring, you turn to the segregated cost section and use the marble under the floor cover, making sure you use the right quality. Once you get the entire thing done, you have to use the multiplier in the green section of the book, and then add in the as is value of the site improvements, which can be determined using the yard/unit costs.

Because we are in areas where there is usually some vacant land around, I find I can usually at the very least find enough data to develop a land value using allocation.

Once all the number are added, you'll find that 9 times out of 10 the cost exceeds the Sales Comparison Approach, and you'll have to reconcile the difference, so that the cost approach reflects market value, using depreciation. In almost every market I do by us there is economic depreciation.

OSU Beavers
08-11-2010, 02:42 PM
The M&S cost curve seems to be too steep for my area with low end stuff being more expensive to build than MS estimates and highend stuff being much cheaper to build. So even if I use my own local cost multiplier it is not very accurate.

Tim Hicks (Texas)
08-11-2010, 02:57 PM
Why are the costs in building-cost.net always too high?


Every appraiser should have to learn how to do a full cost approach with the Marshall & Swift 1007 form before they ever attempt to do an appraisal on their own. It would help them immensely in building their cost approaches and unlearn the fake cost approaches done by so many.

Mztk1
08-11-2010, 04:44 PM
Every appraiser should have to learn how to do a full cost approach with the Marshall & Swift 1007 form before they ever attempt to do an appraisal on their own. It would help them immensely in building their cost approaches and unlearn the fake cost approaches done by so many.


I agree with that. One of the best courses I have taken was by the IFA on how to do a proper cost approach using the Marshall & Swift. That was when I appraised in one of the northeast states where everyone said the M&S does not work, but after I took the course I found out how incorrect they were. Now in Florida, I hear the same thing, but once again, from experience, I know the M&S does okay.

Also, when adjustments in the market are difficult to find, one can rely on the cost approach using a cost/depreciation analysis to estimate a market reaction to certain amenities (per the AI's Appraisal of Real Estate). Knowing how to do a good cost approach can be very important for supporting some of those adjustments.

Elliott
08-11-2010, 06:56 PM
Sand states always have liked the CA. Probably why they've had the
biggest losses in market value.

BigBear Seattle
08-11-2010, 08:28 PM
In my recent experience here in the Seattle area, the cost approach based on M&S is usually fairly close to or higher than the sales comparison. That is if I do a good job of matching the quality of the construction to the descriptions used in M&S instead of depending on the assessor's quality rating to select the M&S table.
However, during the boom times, I would have to go two tables higher to match the sales and cost approaches. The volume builders were getting VGood prices for Average quality homes. Of course the banks now own most of those homes.

jimmyfrank
08-11-2010, 10:38 PM
The first thing to recognize is that the "cost" number in the cost approach section of the Fannie forms is an aggregate number that includes all costs and profit/loss margins, whereas the base costs in M&S reflect fewer items. You have to add a lot of items to those base costs just to reflect the items most homes have, like flooring and kitchen appliances and fireplaces. That's not to mention the size and shape multipliers.

M&S also notoriously undercounts local indirect costs like fees and permit costs for some of the metro areas. The last I heard, local fees and permits in my region average about $40,000 per unit whereas M&S uses a national average that is less than $10,000. M&S also uses an arbitrary developer profit margin of something like 12% - that works a whole lot better in some areas than others, and it works a lot differently depending on when during an economic cycle you're hitting it. When times are good the typical developer profit margin is a LOT more than 12%, whereas during bad times it can drop below zero to represent a net loss to the developer.

You can complain about M&S not doing your job for you all you want, or you can recognize what their limitations are and proceed from there. It's just like any other source of data out there - none of them are perfect.
Ditto, George. Some appraisers are too lazy to take the time and effort to complete the cost approach correctely. If you have better cost data use it. In my area it is too high, so you must apply some degree of reasoning.