Cost Approach and those who "mail it in"

[Meandering]

Are you going to rely on M&S and say that all of the bids and the current contractor have no idea about local costs? Somehow M&S says that it will only cost $95,000, when there is no contract in his right mind that would build the home for that little?

Contractor bid differences typically result from:
Builders with a good reputation charge more
Builders that have been in business a long time typically charge more
Builders with full time crews and few subcontractors charge more.
Builders with in-house architects charge more.
New builders charge less, typically than the builder with the same office for 15 years.
Builders that subcontract most of the work charge less.
Builders that work from their garage or home office charge less than builders with commercial office space.

Because you want to mirror "market typical" you could take the average, the median or chose two or more builders that have estimates that are very closely correlated with the quality required and the “time to complete” estimates and use that to compare with M&S.

It aint rocket science but it does take research and thought.

 

[Elliott]

CA isn't worthless if done really well. But it is mostly worthless.

 

[Michigan CG]

I am in disagreement with all of you. In order to do an accurate Cost Approach, it takes as long as writing up a 1004. The M&S version is not an actual CA. It is actually useless for determining Market Value......

No one said doing a credible Cost Approach should take five minutes.

A cost Approach can be a very reliable indication of Market Value..........if done correctly.

I would suggest a 40 hour class, reading a few texts and a couple years of experience with folks who use the approach on a regular basis before you cast a broad judgment.

 

[David Mescon]

I am in disagreement with all of you. In order to do an accurate Cost Approach, it takes as long as writing up a 1004. The M&S version is not an actual CA. It is actually useless for determining Market Value.

M&S does not provide actual costs. Have any of you actually determined actual costs? It is far different than what you get from M&S. When some of you tell me that you do an actual CA using actual costs, then I will respect your opinion on the reasonableness of including these in your reports.

If any of you think that filling out the mutli-page M&S form is a real CA, guess again. All it is, is form filling. You are readiing the M&S manual, looking up the indicated costs and plugging them into a form.

Imagine doing that for the Sales Comparison Approach. Make adjustments according to what some special "Adjustment Book" tells you. I know we joke about the "Adjustment Book" in this forum, but when you use M&S that is actually what you are doing. To be it is laughable, but sad, because that is what many of you think is a real CA.

That is why FNMA stopped requiring the CA. It is actually useless for Market Value. The only entity that actually cares about cost is an insurance company. That is it. If you want to find out the cost of a new build, then why not just ask that actual builder? The home is getting built. Find out how much it cost to build it from the actual contractor? That would be far more reliable than using M&S, and the information is typically available.

What are you going to do?

1) Contractor provided documentation that the cost to build is $110,000.

2) The owner provided three bids for this home ranging from $110,000 to $120,000.

3) M&S states that the cost to build is $95,000.

Are you going to rely on M&S and say that all of the bids and the current contractor have no idea about local costs? Somehow M&S says that it will only cost $95,000, when there is no contract in his right mind that would build the home for that little?

The CA is uselful if it is done correctly (Which it never is in residential appraisal work). It is usefull to determine the cost to build the home. Nothing more, nothing less.

Hey Ken, I couldn't help but wonder what you would get if you added some EI to the Marshall number, since they exclude it from their costs. :icon_mrgreen:

 

[Joyce Potts]

Another Certified General who should mail back their certification .... seriously .... just mail it in and go back to whatever work you were doing before fooling the appraisal board you knew something about appraisal.

PS ... tell you what .. I will even take up a collection to pay for the stamp and envelope for you to put the certification in and if youd like I will have a courier service pick it up for you .... deal?

Great stuff, PE.

 

[CANative]

Great stuff, PE.

I don't think it was such great stuff to tell that CG he should mail his license back over an opinion that the CA is meaningless. In some cases it IS meaningless. The CA is based on the principle of substitution. Where is the meaning in a CA done on a SFR in a fully developed neighborhood where there is no option of building a substitute property. The buyer is buying that house because that is where it is located. The buyer will not consider whether he should buy the completed property or build his own in the same location because he can't.

PE's intransigence on this issue should be a topic of discussion if you ask me.

 

[J Grant]

Joyce, you think an appraiser telling a peer he never met and knows nothing of, a first time poster, to send back his license is great stuff?? Is this board kindergarten?

 

[Mr Rex]

Hey Ken, I couldn't help but wonder what you would get if you added some EI to the Marshall number, since they exclude it from their costs. :icon_mrgreen:

EI as reflected by M&S is often unneccesary, non existent, or hard to detect until the national level builder/developers become involved. Which might explain why the Case/Shiller index is not reflective of the real story. Why is EI an add on to the Land Cost anyway? All M&S is missing is the development cost and added profit/risk for the development to make a site saleable as a marketable SFR entity. Why would that not be included in the Cost of the site? Except when the only sites available are captive to large builder/developers who purchased the land in mass and developed it? Even when builders buy down multiple sites in a subdivision, they often advertise lot prices (which includes EI). When doing a CA in these cases, no additonal EI/EP is warranted, unless you label it as it is, Excess Profit (or Excess Incentive).

 

[CANative]

The only ones building houses for free are Jimmy Carter and Bono.

You've got to put some EI into the cost approach. It's an element of cost. A developer wants to be compensated for his risk and management. An owner occupant wants to be compensated for the delay in building versus buying.

 

[Mr Rex]

The only ones building houses for free are Jimmy Carter and Bono.

You've got to put some EI into the cost approach. It's an element of cost. A developer wants to be compensated for his risk and management. An owner occupant wants to be compensated for the delay in building versus buying.

But the development cost of the lot should be included in the land cost, even if appraising a Jimmy Carter special.