Is The Cost Approach A Real Thing?

[Dublin ohio]

To be confuse regarding the Cost Approach is what's wrong with USPAP.

Please post the "confuse" part of USPAP regarding the cost approach. I am not familiar with the 'confuse' Part

 

[Fernando]

I trusted the builder. I thought they were special lots.

 

[Fernando]

Please post the "confuse" part of USPAP regarding the cost approach. I am not familiar with the 'confuse' Part

All roads end at USPAP. Be more practical and should have indicated the three approaches to value.

 

[Terrel L. Shields]

is what's wrong with USPAP.

No. It is what is wrong with FHA and Fannie/Freddy. USPAP describes the CA, IA, and SA...Fannie assumes the SA is the only approach.

 

[andrew81]

Can someone try and explain the cost approach?
Please Help!

I will not attempt to teach you how to perform a cost approach, however, I can give a brief explanation of why I believe it is relevant in appraisal practice.
I am definitely no expert in the cost approach and would not hold myself out as one. This is my opinion on the fundamental concept of the cost approach.

Appraisal of Real Estate 13th Edition
Chapter 17
The Cost Approach
"The principle of substitution is basic to the cost approach. This principle affirms that a knowledgeable buyer would pay no more for a property than the cost to acquire a similar site and construct improvements of equivalent desirability and utility without undue delay."

Buyers in the market make a decision, should I buy an existing home or build new? That is what the appraiser is doing completing the cost approach. Emulating the market. If the cost new is significantly less than the cost of an existing comparable home, no one would buy the more expensive existing home. (or vice versa, if the cost new is significantly more than the cost of existing comparable homes, there would be no or very few new construction limited to only the very wealthy not concerned with price)

A cost approach significantly lower than the sales comparison approach goes against the principle of substitution.
If it only cost $400,000 to buy a lot and build a new home, but existing comparable homes are listed for sale at $800,000, there would be no buyers for the $800,000 property; until market conditions decreased and existing homes can be purchased for $400,000 or less, or the cost of construction increased to $800,000 or more.

The cost approach helps determine highest and best use as though vacant.
The cost approach helps determine if it is cost effective to build new or buy existing.
The cost approach helps determine if the improvements should be demolished and a new similar or different improvement should be built.

 

[Overimprovement]

One nice benefit of being well versed in the CA is if you ever want to get into flipping, it is a great skillset to have.
Let's say a C4 house is for sale. Windows are 30 years old. Your market (SCA) knowledge will tell you if top tier buyers will demand new windows or not. Your CA knowledge will help you estimate what that might cost. Easy cost/benefit analysis. Same with most other large items. Supplement any cost book data with local knowledge. Labor is usually the toughest data to pin down. Yeah, maybe the low bid electrician will wire up the newly finished basement for $4K, but how many months out is he?

 

[Fernando]

CA not very accurate in many cases in which we appraise typical homes.
However, CA can be only approach when it's a unique property or lack of comps.

 

[Surf Cat]

Can someone try and explain the cost approach? I am a trainee and just submitted my work samples to BREA for review (5 samples?!), and I do not really understand the cost approach enough to be asked about it. More often than not there are zero land sale in the same zip code as my subject let alone a comparable lot. I have spoken with a few appraisers and it seems like they just make up some information and throw it into the cost approach section. Is there a comment that appraisers are putting into the text addendum that explains what is going on or are we all just hoping that the state does not get a copy of the report? Am I supposed to break down every aspect of the dwelling from the cost of 2 by 4s to the cost of the tile grout or is there an "easy" way to arrive at a cost per square foot in my market area?

Please Help!

Frankly, I'm quite stunned that you're submitting work samples to the BREA when you don't really seem to have even a basic understanding of the CA.

So, you passed the exam then yes? Licensed or certified? You don't submit work samples without passing the exam. How'd you get by the CA questions? How did you complete the cost approach on your work samples that you turned in? I'm flummoxed, vexed.

Anyway.... pick up Appraisal Review Crammer by Hondros Learning. Even though it seems as if you passed the test, it goes through a review of terminology and concept application step by step. And not just for the CA, but influences on real estate values, types of value, economic principles, highest and best use, etc etc. Lots of problems and solutions with step by step keystrokes for the HP12c. It's way better than the texts that I used when I took my appraisal courses imho.

 

[Terrel L. Shields]

CA not very accurate in many cases in which we appraise typical homes.

Often any "inaccuracy" is the excessive profit margins some builders can make in some markets plus the enormous "soft costs" that apply. When a permit and inspections cost $50k or some such as I've heard happens often in CA, well, that is a hard number to add to construction.

If using the CA and using local builders costs, you need to document WHAT builder and make sure the builder is providing you with these soft costs as well as the EP the builder/developer expects to make.

 

[George Hatch]

The 30-second CA process that a lot of appraisers use should never be assumed to be well refined.

- Land value by I-backed-into-it (sales comparison conclusion - depreciated costs = site value) is meaningless all by itself. And virtually always wrong when compared to actual site values.
- the bundled cost/sf figure in most cost services is an aggregate that includes multiple elements, all of which can vary somewhat from the base descriptions
- Fees/permit costs vary by jurisdiction. As an example, there are 88 municipalities in Los Angeles County alone and all of them have a different combination of fees and permit costs.
- costs and profit margins vary according to property type and market demand in that market segment.

If an appraiser would spend as much time actively developing a Cost Approach as they spend on their Sales Comparison the CA outcomes would often - maybe always - end up looking a lot different than the 30-second CA cartoon that normally gets used in the 1004.