Cost Approach and those who "mail it in"

[J Grant]

Denis,

The appraisals I reviewed with swollen cost approaches that "supported" inflated SCA values never seperated out the EI /EP or explained it, the cost to build was just higher and land values ridiculous.

Do the appraisers adding in EI/EP over contractor /builder profit already built into cost to build , are you seperating it out and explaining it?

Ever felt the EEP/EI amount was above market credibility, or do you always add enough EP/EI to make the CA value line up with your SCA value?

 

[CANative]

The California Assessor's Cost Handbook tables include EP. Marshall & Swift, Craftsman, etc. do not include EP. EP (or EI if you prefer) is a recognized element of cost. You have to put it somewhere.

And in my opinion it must be included even in markets where it's obvious there is no EP or EI happening as of the date of value. That's because it's not reasonable to believe that a property would be developed sans developer profit. Yet we are forced develop a theoretical property in spite of the obvious.

So how much to include? I'd say the minimum amount a developer would consider to undertake a project. Perhaps 10% to 15% of the project cost. The next step is to erase that with the depreciation resulting from external factors.

 

[J Grant]

CAn NAtive...it would be interesting question to ask real builders and developers...they operate on a scale when they build a larger developement or even a small/mid size development , if they themselves are a large company.

I don't know where M &S gets their info. But is their, or other cost handbooks the cost to build one house at a time? Because a spec builder building one house, would be paying more for materials then a developer building a 200 home subdivision, and especially if this was a national or region wide developer building maybe several thousand homes in diff areas. They can order supplies in bulk and save on costs, so some of their profit results in the wholesale/retail scale...they charge buyers the "retail" spec home cost to build, but they are paying their suppliers wholesale, and maybe even their crews less if they can manage that.

Imo it gets really tricky when appraisers are supposed to figure out what a developer makes, or should make from a project. An estimate of 10-15% makes sense, but who knows? They don't even know. Seems even some of the best developers lose money on building, even in a good market, due to cost overruns, bad weather, delays due to zoning or other problems, sudden competition from another new development etc.

So it seems there should "always" be EP, but sometimes it evaporates. And then you get into excessive, or not market supported EP, when developers rig prices, sell high to straw buyers to establish first tier price points, overcharge for lot premiums that are not seen in the resale market, inflate prices due to ofering their own inhouse financing etc.

At what point does an appraiser differeniate between EP that is supported in resale market, or EP the developer can get away with charging if they are clever enough?

Ever go into the "Design Center" of a new home development? That is where they make a lot of their profit. They charge retail high end prices for diff choices of tile, counters, etc, while they buy the material in bulk wholesale price. They charge for line item upgrades such as faux marble counter sills, nicer light switches, grout color, carpet pad thinckness, extra insulation, and on it goes...the line item upgrades can add up to let's say 50k over base price, but only command 20k a year later in resale market over a non upgraded model match.

 

[JSmith43]

Imo it gets really tricky when appraisers are supposed to figure out what a developer makes, or should make from a project. An estimate of 10-15% makes sense, but who knows? They don't even know. Apparantly, even some of the best of them lose money on building, even in a good market, due to cost overruns, bad weather, delays due to zoning or other problems, sudden competition from another new development etc.

That is why EI is the question to ask developers that are now mostly sitting tight. "How much EI is required to get you off your "arse" to develop?"

EI becomes known via survey.

 

[J Grant]

That is why EI is the question to ask developers that are now mostly sitting tight. "How much EI is required to get you off your "arse" to develop?"

EI becomes known via survey.

Appraisers, or even Marshall Swift or another cost service can survey developers, but imo, the developers are going to give a corporate approved generic answer...they have their shareholders to answer to and the IRS to worry about etc...they may not want it known when they are taking a big loss, or making an obscene profit.

Beyond that, the CA, if it included developer EP, what does it matter in the value as to the typical buyer for subject? If the CA is not just a value indicator, but supposed to be a MV indicator, as some claim, then the EP a developer makes is not that relevant...because the MV for the subject assumes the typically motivated buyer is purchasing with no special creative financing or terms etc...aka, what does the typical buyer pay for builder match model without the fancy sales office, the add on design center, the favorable financing etc (all of which hide true builder profit). Judging by the history of many developments, the houses lose 10% or more value the first year, and maybe even the very next day, much as soon as you drive a new car off the lot it loses value just because it is not brand new dealer car , and has to be sold without dealer financing, dealer incentives and without the sales ploys of the dealer that hide profit.

What was the cost to build the car? Maybe it cost 12k to build at the factory. You buy it from the dealer for 20k, after adding a sunroof, leather etc. The day after you drive it off the lot, you have to sell it and even though it is one day used, you can only get 17k. Is the VALUE of the car 17k, or 20k?

Are we valuing a house with full EP that a developer with trained sales staff, fancy brochures decorated models etc can get? Or is our CA value supposed to be what the house sold by normal means aka plain old MLS realtor holding an open house can get?

 

[J Grant]

Question about the applicalbity of adding EI/P to cost approach...

Is the cost approach supposed to replicate the value of the individual borrower would PAY to replicate or reproduce subject on the same lot? If so, why does the borrower suddenly become a developer who is entitled to a profit?

If the cost approach is about figuring the cost to build to the borrower to build a new subject, this ONE house on ONE lot, then the cost approach should be cost to build plus contractor or builder profit, but not ent incentive or profit. The borrower, if theoretically chose to build the subject house new, on an individual lot, the borrower would hire a contractor, not a developer. The contractor would add in their profit, but not expect to make the kind of EP a developer would.

Is the cost approach cost for a contractor to build plus land, when did it morph into cost plus profit for a developer, meanwhile a developer would never build one house at a time anywhere, normally that is spec building done by smaller building firms or individual contractors.

Aka, the CA is cost to BUILD, not cost to DEVELOP. Beisdes the profit issue, developers have other costs, advertising, hiring sales staff, getting zoning approvals, impact fees etc...so why are appraisres blending developer models of cost and profit into the building cost in the CA, which relies on M &S or other handbooks or estimates from builders of building one house (assumed to build one house without advertising and other assoc developer costs of sales center etc?) If we leave out developer costs, why suddenly stick in their anticipated profit?

What does a developer, who builds 400 houses at a time, what do their costs and profit have to do with replacement or reproduction cost of subject, one individual house on one lot?

 

[Mr Rex]

Question about the applicalbity of adding EI/P to cost approach...

Is the cost approach supposed to replicate the value of the individual borrower would PAY to replicate or reproduce subject on the same lot? If so, why does the borrower suddenly become a developer who is entitled to a profit?

If the cost approach is about figuring the cost to build to the borrower to build a new subject, this ONE house on ONE lot, then the cost approach should be cost to build plus contractor or builder profit, but not ent incentive or profit. The borrower, if theoretically chose to build the house new on a lot in subdivision, would hire a contractor, not a developer, and the contractor would add in their profit, but not expect to make the kind of EP a developer would.

Is the cost approach cost for a contractor to build plus land, when did it morph into cost plus profit for a developer, meanwhile a developer would never build one house at a time anywhere, normally that is spec building done by smaller building firms or individual contractors.

JGrant, you would do yourself a great service by purchasing a copy of The Appraisal of Real Estate. EI & EP is nicely explained on pages 360-363 in the 12th edition. Its almost 760 pages including the index, a wealth of knowledge that is great to have on your desk close at hand.:icon_idea:

 

[J Grant]

That is why EI is the question to ask developers that are now mostly sitting tight. "How much EI is required to get you off your "arse" to develop?"

An individual buyer would build for their own use to live in, and would not need EI to build. When did the cost approach to build morph into the cost approach to develop? (general question to all interested, not just to Mentor though am interested in his response as always!)

 

[JSmith43]

I don't get into this CA stuff as deep as the grasshopper. Not today, anyhow.

Besides, I don't have the current AI books. Mine are AIREA era:icon_lol:

I am confident not much has changed.

 

[J Grant]

JGrant, you would do yourself a great service by purchasing a copy of The Appraisal of Real Estate. EI & EP is nicely explained on pages 360-363 in the 12th edition. Its almost 760 pages including the index, a wealth of knowledge that is great to have on your desk close at hand.:icon_idea:

Okay, it will explain EI/EP....but does it say WHY the cost approach, which is cost to build, should include developer EI/EP, which would change it from cost approach (to build) , into a cost to develop approach?

In other words, the CA asks to replicate cost to build either replacement cost or reprod cost of subject on subject lot. It is asking for cost to build, it is NOT asking for cost to develop, as the typical buyer for subject is not assumed to be developer. So why are appraisers sticking developer profit and incentive into cost to build geared toward the typcially motivated buyer, who if they chose to build new (the premise of cost approach,) would build the subject new as an individual hose on the one lot and live in the house...this borrower would not suddenly become a developer out to build subject and make a profit. ( a developer typically does not build a house at a time, and if they build for their own family use to live in, they are not building for profit)