Cost Appraoch Insanity!

[xmtpedprl]

But Denis, isn't an explanation in order...?

Dave...

 

[JT1974]

and it (the oracle) said

two approaches

each independent

vary from each other

by a mystical number

can be. in this case,

reconciled/explained by what has

happened in the larger market

that is not due to any on site changes

or in cost changes (internalities)

The reconciliation uses the difference in figures as the

adjustment that "explains" the difference but to my way of thinking it

is not the same as equalizing the approaches. I mean the Ex Obs is

what the SCA is telling you based on market decline, not a number generated in the
CA itself.


For this example you have to work the SCA first which is a good idea anyway

in order to see if there is a real gap between SCA and CA in a 2 year old home.

Two years ago the gap would not have been there and we all know what has

happened worldwide in last 24 months including the UW/reviewer of your report.

TJsum-san is also right, the diff is in the pocket of the builder now, but if the builder still owned this house, they would have the same problem as your 2 year owner.

Very well said, indeed!

 

[Craig in Oregon]

Denis,

It's down to hair splitting so I just wanted to say that just about every post of yours I've read over the years made good sense when directed at solving an appraisal problem.

For some reason those of us on the Left Coast see things differently that those from elsewhere, not necessarily better, worse but differently. As in value of CA for a 2 year old house. Required or not.

Making the EO adjustment in the EO CA box shows how that difference, which is derived from the SCA indicated value, fits into explaining "that it ain't worth now what it was then". CA and SCA won't necessarily be equalized, more like weight approximated, in my experience.

Market decline is a troublesome, sloppy, discouraging, painful thing to deal with professionally but we gotta have it sometimes.

 

[Pat Butler]

I think there's also the possibility that your cost per square foot in excess of $100/sf is too high. If the comps are showing around $270K then your subject would only have a gross cost/sf of around $65, and that includes the land. I'm assuming that your comps are truly comparable and am taking the $65/sf from them. The excess amount of living area is really making the replacement cost too high.

If the replacement cost was reduced then the land value would be increased above the $1. In any event, it seems like an overimprovement and an external obs. adjustment is warranted.

A related situation exists in Naperville with all of the teardowns. A lot of the eastern part of downtown properties are bought then torn down. My cost approach for those sorts of properties will typically have an ex. ob. adjustment equal to the replacement cost of the improvements. Clients don't like to see that either, but it matches with the reality of the market.

 

[hastalavista]

But Denis, isn't an explanation in order...?

Dave...

Sure. If I had a big discrepancy (which I had recently) between the CA and the SCA, I'd want to explain it. And I did.

I completed a river-frontage appraisal on a custom home. No similar comps last 2-years. A detailed analysis.
But, I did the cost approach because I concluded, in that case, there was a sufficient number of buyers who would consider (and have the wherewithal to do it) building the house themselves rather than try to buy a ready-built substitute.

My cost approach was 20% higher than my SCA. And I did had land sales (closed and and active) that had almost similar river frontage.

I considered making an economic obsolescence adjustment. I decided against it. What I did do is this: I explained that my cost approach analysis better indicated the feasibility of building a replacement for the subject and, based on the market conditions, building a replacement for the subject wasn't financially feasible. Therefore, I gave the cost approach no weight in my final value reconciliation because the typical buyer would purchase at the lower cost vs. build at the higher cost. :new_smile-l:

(now, this is the first time I made this type of conclusion in a report. I'd appreciate any feedback from anyone who sees any issues with the rationale)

 

[TJSum]

Threads like this are why I come to the Forum, great learning tool.

Denis, I think the important thing is to properly explain what is done, as long as that takes place, it could be done either way.

 

[Pat Butler]

I took a quick look at sales above 3,500 sf in Round Lake since '07 and there were 4 or 5 properties mostly clustering around $300K. Most were newer too, so their gross price per square foot (including land) would be no more than $100/sf. Take away the land and I think a more reasonable replacement cost might be closer to $75/sf for these larger houses. That will then result in a higher land value that would be more reasonable.

A quick search of land sales during the last few years shows that they top out at about $50K, though a few are higher. So land values appear to be on the low side anyway.

 

[xmtpedprl]

Denis,

Great stuff, I am being stimulated tonight!

Pat,

There is no way to reconcile the CA with the SCA without an EO applied, I see that clearly now, I just didn't pull the trigger.

I was wrong to use $1.00 in our report, but heck, I was getting frustrated, and the report didn't even call for it. I won't make that mistake again.

Dave...

 

[JT1974]

I think there's also the possibility that your cost per square foot in excess of $100/sf is too high. If the comps are showing around $270K then your subject would only have a gross cost/sf of around $65, and that includes the land. I'm assuming that your comps are truly comparable and am taking the $65/sf from them. The excess amount of living area is really making the replacement cost too high. It appears you are confusing market value PSF with replacement cost PSF. The last time you could build a new 4,000 SF McMansion for around $65 PSF was in the 1990's.

If the replacement cost was reduced then the land value would be increased above the $1. In any event, it seems like an overimprovement and an external obs. adjustment is warranted. An overimprovement would result in functional obsolescence, not external obsolescence. Remember, external obsolescence is a loss in value caused by factors outside a property (i.e. oversupplied market, adjacent landfill, etc.).

1234567890

 

[xmtpedprl]

Pat,

There's a LOT more than 5, where did you get that from? We had 7 on one report alone, and not one was sold earlier than August.

Dave...