Condo Cost Approach?

[icisic7]

I have a client whose lender is insisting on a CA for a condo assignment (refinance). It is a detached dwelling with built-in 2 car garage (main BR, BA, walk-in closet and balcony are over the garage) - just like an ordinary house, except for the condo ownership rights. It's in a gated community, built in 2000.

So, how does one go about this? They don't own the land upon which it sits, so do I just leave out the site value? They want it for insurance purposes (naturally) even though I tried to tell the client the CA doesn't include the cost of demolition and debris removal if it burns down or falls apart in an earthquake. The lender still wants it.

Any suggestions would be appreciated!

 

[Walter Kirk]

In this situation I would give a replacement cost for the improvements only. I would note that site improvements, demo costs etc are excluded.

 

[The Warrior Monk]

Can a cost approach on a condo be done? Sure.

I have personally never done one, but I am somewhat familiar with the methodology. It is a much more involved assignment than doing a cost approach on a SFR, and, IMHO, it is utterly meaningless.

My fees for such an assignment would be in the four-figure range.

Or, they could have an insurable value done for a fraction of the cost.

I actually recently had a trust company ask me do determine the insurable value on a condo unit. I feel out of my chair because they asked for an insurable value rather than a cost approach.

 

[Lee Lansford]

So, what's your fee for this new assignment?

What are you identifying as the Intended Use of the CA? Intended User?

Are you being asked to re-visit the appraisal already communicated and now include the CA in that report?

What are you being asked to do and how are you going to communicate the results?

 

[Ariba]

They want it for insurance purposes (naturally) even though I tried to tell the client the CA doesn't include the cost of demolition and debris removal if it burns down or falls apart in an earthquake. The lender still wants it.

I have a disclaimer in my SOW that states that the appraisal intended user is the client to determine an opinion of market value as collateral for a mortgage refinancing transaction. The appraisal may not be used for any other purpose including but not limited to determine, title insurance, property insurance, etc.

You are not an insurance broker. To much unwanted liability. What if the house burned down and they under insured based on your Cost Approach. Who do you think they might come after. Maybe they won't get anywhere but you still have to defend yourself in court.

If you do the Cost Approach make sure you put a disclaimer in the narrative of the report that it is not for insurance purposes.

 

[hal380]

Hi Icsic7

They are changing the scope of work after the fact, after the fee quote. Obviously you can do what you want to do, but I have been asked to do condo cost approaches before, and I ask them to supply the site value before I can proceed. They clearly are sniffing around for an insurable value. Go ahead if you want. Fools rush in where wise men fear to tread ... etc etc

Regards
Hal

 

[Fred]

Are you being asked to re-visit the appraisal already communicated and now include the CA in that report?

It’s simply a new assignment. :icon_question: The reorted results could be literally appended by staple to a copy of the other report, figuratively appended to the other report incorporating it by reference, or put in a stand-alone report.

Obviously you can do what you want to do, but I have been asked to do condo cost approaches before, and I ask them to supply the site value before I can proceed

That’s interesting: appraisers asking the clients what the property is worth.

I actually recently had a trust company ask me do determine the insurable value on a condo unit. I feel out of my chair because they asked for an insurable value rather than a cost approach.

I have been doing them for 15 years. But never for a single unit. I guess these detached units?

 

[The Warrior Monk]

I have been doing them for 15 years. But never for a single unit. I guess these detached units?

As a matter of fact, yes!

 

[Don Clark]

They can be done. In my market which includes 8 Independent cities with their own assessors, courts, fire, police(not part of any county), 2 counties in Virginia and 2 where I do work in North Carolina, every assessor has assigned a value to the site for tax purposes. I would ask the assessor if that is the case in your market, how they derived the site value. For a detached Condominium the rest should be simple.

 

[incognito]

For a detached Condominium the rest should be simple.

Maybe, maybe not. Condominium ownership is described a "air rights ownership", along with exclusive, and non-exclusive use of common elements. A presentation of a cost approach would imply, I believe, that all components could be reproduced. How do you reproduce your 1/50th share of the pool, the rec. room, etc?? Does the association own the exterior of the SFD structure (it is quite possible). This is an important consideration as well.

I think your best bet is to offer to do an insurance replacement cost opinion, but stay away from implying that your conclusion has anything to do with market value. It can't....