1004 Cost Approach -- Proposed Construction

Discussion in 'General Appraisal Discussion' started by ZZGAMAZZ, Aug 28, 2007.

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  1. ZZGAMAZZ

    ZZGAMAZZ Senior Member

    0
    Jul 23, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    1) I'm conducting a construction loan appraisal for a proposed construction SFR on a lot that the borrower already loans. The builder provides the line item breakdown of anticipated costs. Should I "un-itemize" the builder's specs into the various line item entries in the 1004 Cost Approach template? If so do I apply a square foot factor, which seems to be redunant if the builder is already providing the total estimated costs. 2) Whenever I conduct an analysis of vacant land sales in the Cost Approach section of the 1004 (even using appropriate per-square-foot factors above-and-beyond the M&S numbers) the final total inevitably is less than the result of the independent sales comparison approach. Do M&S include entrpeneurial profit? If not does the appraiser did to disclosure the fact that the result of the Cost Approach, by definition, is less than the SC approach? (I realize that these are very basic questions but I've been stumped for 2 years now...)
     
  2. Mike Garrett RAA

    Mike Garrett RAA Elite Member

    1
    Jan 14, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    There are several ways to handle it. I prefer the more simple one. Using Marshall/Swift lump sum figures, as adjusted to reflect the local market. Some appraisers will scan in the builders actual costs, some will do a break-out method using Marshall/Swift cost estimator sheets as attachments. If you do a really good job of estimating the costs and your cost approach is not coming out close to the sales comparison approach it is probably telling you the site value is incorrect.

    Be sure to check for local and time multipliers. Are you including tap fees and utility hook-ups? IN MY MARKET those often are $8,000 to $10,000.
     
  3. leelansford

    leelansford Elite Member

    14
    Mar 29, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    Just bear in mind...when you communicate the Cost Approach, it becomes YOUR Cost Approach. That is, what the builder is providing to you may, or may not, be a reasonable representation of the market. Be careful
     
  4. Mike Boyd

    Mike Boyd Elite Member

    0
    Jan 18, 2002
    Professional Status:
    Retired Appraiser
    State:
    California
    I agree with Mike G. In addition, since you asked, no, M&S does NOT include entreprenueal profit nor does it include projected selling costs or construction loan fees and interest. Also, any off-site costs may not be included.
     
  5. Mike Boyd

    Mike Boyd Elite Member

    0
    Jan 18, 2002
    Professional Status:
    Retired Appraiser
    State:
    California
    One of the reasons why your client might want the cost approach is to compare the builders figures with what you have come up with. This will flag padded costs a builder might include hoping to get a higher LTV.
     
  6. Mr Rex

    Mr Rex Elite Member

    22
    Jan 12, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    North Carolina
    See Page 2, # 2 in M&S.:) Builders profit is included, see #7. Developers profit is not, and would likely be reflected in Land Costs
     
  7. alex gilbert

    alex gilbert Member

    0
    Feb 21, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Develop your own opinion of cost so the client can compare to the builder's cost. Entreprenueal profit is not included in M&S. If there is entreprenueal profit you can add it into your per sf cost, show it as separate line item, or leave it out and comment in your reconciliation that the difference between cost and sales approaches may be due to e. p. Develop an opinion as to land value but do not include e.p. in the land value.

    One technique you can use is to take the final Cost Approach value, subtract the land value and add back in any depreciation. That'll give you the total estimated cost to construct. That total can be compared with the builder's submitted total. I would think anything within 10% or so is reasonable. If there's much more of difference look for reasons why - maybe the submitted costs don't include soft costs or e.p. Maybe the submitted costs are padded. Sometimes submitted costs don't reflect work the owner is going to do themselves, sweat equity.

    Not every proposed SFR will have entreprenueal profit. If its a "spec" project it should. Otherwise why build it? But I've seen many custom projects where the borrower is building their "dream house" where there is no e.p., or where the cost to construct exceeds the market value. If that's the case it can be reflected in the Cost Approach as a functional obsolescence superadequacy adjustment.
     
    Last edited: Aug 28, 2007
  8. Denis DeSaix

    Denis DeSaix Elite Member

    43
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    (my bold)

    Just to jump on Alex's point, I've seen this too and it required me to make a FO adjustment (some, rather big-time). If you do this, I suggest you explain it in detail.

    One other thing I'd consider: When developing my opinion of the site value, if I am using the extraction or a vacant-land survey, I am going to have to consider the significant downturn in the markets (at least mine) that have occurred since the end of July. If I don't consider these, I may have a site-value that is out-of-whack with current market values.

    (of course, if I failed to consider the same thing in my SCA, I'd have a SCA value that was equally out-of-whack!).

    But it is easy to forget how the two approaches to value correspond in parts of their analyses. It be nice if they corresponded in end-result reliability too, but that's an argument for another day!

    Good luck!
     
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