Cost Approach and those who "mail it in"

[CANative]

So the question is, who is this theoretical builder/developer?

Not germane to a MV opinion.

 

[CANative]

The cost approach asks for a neutral cost to build, it does not ask for a cost to build plus profit from a developer,

Quoted from the 13th Edition...

Cost Approach:

A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive; deducting depreciation from the total cost; and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.

 

[David Mescon]

Right, the cost to build to a theoretical, agreed on party, obviously we can't figure individual costs if someone built house themselves, or had their dad help them vs someone who hired a cheapo contractor vs someone who hired a top of the line contractor.

Exactly. That's why we extract reasonable costs from the actual market which are reflective of what the typical builder of such a property has been paying.


So the question is, who is this theoretical builder/developer? There is no standard model, apparantly. There are standard manuals, which many rely on such as Marshall and Swift. But beyond that, it is like the wild west...add in a huge amount of EI in a rising market, add a moderate amount in a stable market, none in a down market, or add some just because the theory is no one would build but than stick in a bunch of ec obs from the same market, and so on.

It's up to you, Ms. Appraiser, to determine who the theoretical typical builder of such a property might be. Nothing beats a historical analysis of the actual market to determine applicable EI. Just interview a number of contractors in the market who have recently built similar homes, and ask them what their EP was. If the market is static, you can go with that figure. If the market is dynamic, make reasonable adjustments for market changes and apply those adjustments to derive an up to date EI percentage or lump sum, (depending upon which is dictated by your market).


The cost approach asks for a neutral cost to build, it does not ask for a cost to build plus profit from a developer, but has morphed into that, even though the typical buyer of our subject is not a developer... and nobody can define what profit is credible because a developer would never build one subject spec home new in an area of cheap homes built in 1950 and so on.

It hasn't "morphed" into anything. We've been doing it this way since before you began appraising. Your example of the new spec.home in the area of cheap 1950s homes demonstrates why doing a credible CA is important. This approach is not always easy, but if performed correctly, can often be an excellent indicator of value, and, teach you about the dynamics of the subject's market and/or submarket.


It is not our fault, the CA is a mess cobbled together from cost manuals, guestimates of land value, developer profit but not developer cost, because developer cost includes sales staff and the like, unknown amounts of profit and depreciation...makes me want a vodka too!:mellow:

All that really matters here is that you compare apples with apples. How is the developer's (commissioned) sales staff so different that the resale homeowner's (commissioned) realtor?

..........

 

[Mr Rex]

For Gods sake, somebody buy JGrant 1 appraisal text, preferably The Appraisal of Real Estate. After a week of reading she will refer to it as the Good Book.m2:

 

[incognito]

For Gods sake, somebody buy JGrant 1 appraisal text, preferably The Appraisal of Real Estate. After a week of reading she will refer to it as the Good Book.

I think she is just yanking everyone's chain! :laugh: This one has been fun to follow! However, CAN does pretty much sum it up pretty well:

Quoted from the 13th Edition...


Quote:
Cost Approach:

A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive; deducting depreciation from the total cost; and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.

What's to argue with?


It is interesting to note, however, that the concept of EP is not mentioned in the 7th Edition, and just appears in the 8th (1983) as a couple of paragraphs. I think it was something that appraisers recognized as an intangible cost, but never named or cared to quantify in the cost approach as a single line item figure. This did not make their cost approaches wrong, did it?

 

[Mr Rex]

I think she is just yanking everyone's chain! :laugh: This one has been fun to follow! However, CAN does pretty much sum it up pretty well:

What's to argue with?


It is interesting to note, however, that the concept of EP is not mentioned in the 7th Edition, and just appears in the 8th (1983) as a couple of paragraphs. I think it was something that appraisers recognized as an intangible cost, but never named or cared to quantify in the cost approach as a single line item figure. This did not make their cost approaches wrong, did it?

She's not nearly that good of an actress.

 

[hastalavista]

Denis,

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?

I always explain it, how I get it, and where I put it in my analysis.

Ever felt the EEP/EI amount was above market credibility,

I estimate EI (EI is what is needed or anticipated going into the project, EP is what is earned coming out of the deal). No- since it is market based, it is not above the market credibility.

...or do you always add enough EP/EI to make the CA value line up with your SCA value?

No.

 

[CANative]

What do you think of putting "a reasonable amount" of EI in to make the model work and then depreciating it out based on externalities?

*Note: When I say "make the model work" I don't mean make it come up to the SA value. I mean the notion that the process of the model needs this element because it's not reasonable to develop a property without the expectation of a profit.

 

[J Grant]

Hi thanks for all the repsonses, very infromative! I will buy the book soon...and will let you know when this big event happens.

 

[CANative]

http://www.boe.ca.gov/proptaxes/ahcont.htm

Check out the links to AH501, AH502 and AH531.

Good, free stuff.