Cost Approach and Indirect Costs

[BRCJR]

Very true ... so it is possible the cost approach could include some EP if the market is "paying for it" ....?

Knowing the amount that is seen as typical profit, what motivates the investor, would be identified in the cost approach as EI the way I read and understand EP and EI.

My support for doing so comes from the AI publication "In Defense of the Cost Approach" by E. Nelson Bowes, MAI, published by AI.

They EI and EP could be the same amount and the results are credible either way. I prefer the EI in the cost approach due to the reference available using the publication as my source for EI vs. EP.

It is simply a play on words. The key thing is identifying this "cost" when necessary.

 

[hastalavista]

It is simply a play on words. The key thing is identifying this "cost" when necessary.

(my bold)


Many agree with you, but I see the difference between EI and EP being significant and distinct.
EI is what I require going into the deal; and as you say, is a cost associated with the development of the project.
EP is what I earn once the development is concluded and I sell the project.

The concept is similar (I want a profit for my efforts) but their application is different (EI is what I need going in, and EP is what I get coming out).

EI is always positive (for the typical market participant).
EP may be negative.

 

[Restrain]

In Texas, insurance, financing, etc should not be high, vs CA which often levies excessive impact fees, etc. An example was one city that levied a $200,000 fee for an addition to a single family home. Profit levels that I have observed from builder data can show a projected profit level of 25%. As to lease-up, that is derived from your market. Also, it can be very hard to get a handle on site costs in Texas due to nom-disclosure. If you are relying on affidavits filed with the Appraisal District for site values, I have found those to be 50% low from actual sales prices.

Hope this helps.