Cost Appraoch Insanity!

[Joyce Potts]

Joyce,

Since you said you read the original post and fast-forwarded to the current, I'll add this to what you skipped:
I posted that the AI courses cover Economic Obsolescence.

And, since you've completed the demo I have yet to attempt, I will add that I have it on good authority that EO is an expectation when it is appropriate!

Sure they cover it. Then why do so few appraisers, especially the one in the original post who does so much REO work not understand it?

Don't bother with the demo, just send take the cliff class and send in your check.

When appropriate.

 

[hastalavista]

Sure they cover it. Then why do so few appraisers, especially the one in the original post who does so much REO work not understand it?

Don't bother with the demo, just send take the cliff class and send in your check.

When appropriate.

Joyce,

You put me in the position of disagreeing with you yet deferring to you since you have what I want: A recognized designation which ( I believe) really means something and says something. o

I guess I'll have to settle with this being unsettled. :new_smile-l:

 

[Pat Butler]

Jason- are you saying that the better assumption is that these builders are building $450K houses and selling for $300K. No way. The 4 or 5 houses over 3,500 sf are all clustered around $300K and there's no way that all of those sellers have decided to throw away $150K. That's why the cost/sf of those comps is most likely to represent the top end of construction costs.

 

[JT1974]

Jason- are you saying that the better assumption is that these builders are building $450K houses and selling for $300K. No way. The 4 or 5 houses over 3,500 sf are all clustered around $300K and there's no way that all of those sellers have decided to throw away $150K. That's why the cost/sf of those comps is most likely to represent the top end of construction costs.

Pat,

You have repeatedly confused the terms "cost", "value" and "sale price" as if they are all interchangeable. They are not and I am simply astounded that someone with your level of experience is having trouble with this most basic concept.

You also seem to have trouble with the concept that builders may actually sell houses for less than their cost of construction. In times of rapid appreciation, homes will typically sell for more than their cost to build, hence builder profit. In the current declining market, homes often sell below their cost to build, hence losses to the builder.

The bottom line is that a house is only worth what someone is willing to pay for it regardless of its replacement cost new.

 

[Pat Butler]

I'm not getting the terms confused at all. When I see comps of recently built houses I don't assume the builder is intentionally building houses and selling them for $150K less than what they are worth. It's another story with older comps, but not with recenlty built houses. I'm also aware of the fact that this area has not experienced a drop in values of 30% or so. So that further provides support that these builders aren't idiots. They're simply building houses at a much lower cost than what is being estimated in this case and their sales prices that they are willing to accept are still covering their costs.

And where exactly do you think that cost data comes from anyway? It comes from analyzing recently built houses. There's no other way to accurately figure out builder's profit. So when I see builders actively selling their houses at particular prices I can assume that their construction costs aren't any higher than the sales price- otherwise they still wouldn't be building new houses if they are constantly selling them at a loss.

 

[JT1974]

I'm not getting the terms confused at all. When I see comps of recently built houses I don't assume the builder is intentionally building houses and selling them for $150K less than what they are worth.

So are you saying that these houses that are selling for $300,000 are actually worth $450,000? That's crazy talk! :Eyecrazy:

 

[Pat Butler]

No. I was using the original posters figures that showed a replacement cost of $424K. No builder is going to build a house that cost $424 to build then sell it for only $300K- and continue to do that over and over again.

My very reasonable assumption is that builders are not still building houses that are expensive to build and that have costs in excess of their value. Yes, they do get caught in that when the market takes a dramatic downturn. Obviously their construction costs can then exceed market value. But the market in Round Lake has not dropped by 30%, nor dropped so quickly that builders are stuck with $450K houses that suddenly dropped to $300K. It's more like losses in value of closer to $50K.

MLS data shows that some of these builders are still putting new inventory on the market around $300K. So that shows a relationship between their costs and market value in that you can then assume the cost of construction does not exceed the market value, or else they wouldn't still be building the same type of house. Yet, they are indeed building new houses in the $300K range as evidence by what they are putting on the market, so it's reasonable to assume that their construction costs don't exceed $300K. So that $300K figure at least represents the top end of construction costs for that particular type of house.

 

[JT1974]

Pat,

The original poster indicated a replacement cost new of $424K for a 3,988 SF house. How big are the houses that you claim were built recently and only listed for $300K?

 

[wickedness1]

Attention Trainees:

The above is a good example of what NOT to do.

Thank you Jason. I was thinking back to my classes & thinking then why isn't there just 1 approach to value? lol

I really get it, cost does NOT equal value. In most of real estate history, a house would sell for more than the builder built it for. Not anymore, thats why so many builders are going under, the cost to buy the land, create the site & construction costs are alot more of the builders profit margin (if any profit at all right now) than ever before.

 

[wickedness1]

There's no other way to accurately figure out builder's profit. So when I see builders actively selling their houses at particular prices I can assume that their construction costs aren't any higher than the sales price- otherwise they still wouldn't be building new houses if they are constantly selling them at a loss.

Pat, are these builders still building & selling homes around this lake? Or did they stop building a year or two ago when this bad economy came to a head? Maybe they still have houses to sell, but aren't necessarily still building them?

I know around here there are a ton of brand new homes that were build a year or two ago that can't sell & the builders lost big time on their cost. Just wondering if this is the same scenerio around this lake you & Adept are talking about.