Cost Approach and those who "mail it in"

[PropertyEconomics]

I may be off base here, as usual, but the cost approach is not about reproduction or replacement cost based on M&S or based on Home Depot specials or that you may be married to or sleep with a GC for 34 years.

It's about what the improvements would reasonably cost to replace or reproduce if the client had to hire a GC AT RETAIL cost or going market rates at either a cost plus or turn key basis.

On my own projects, while my husband is a GC, it was often about having a bond or life insurance in place in case he was unable to finish the job and the lender/client had to hire someone AT REASONABLE RETAIL costs and rates to complete the improvements that were affixed to the land for a full collateralization of the loan.

From then on, it's a matter of applying ALL FORMS OF DEPRECIATION.

Joyce .. I dont think you are off base at all ... I think you hit the nail on the head ... just sad that JGrant igorned the question. I knew YOU knew the answer ....

 

[Meandering]

J,

Really, Principals and Procedures from the AI, the book comes with the course, along with the dictionary of Real Estate Appraisal. I know it's a 40 hour begining course, but it is well worth the money and will answer most of not just what's in this thread, but many others concerning theroy, technique and methodology.

Okay, that's my one plug for the AI for the next 6 months, so now I can go back to bashing them. Where's Pete?


.

 

[Joyce Potts]

One of the indicators I used to determine builders were charging too much to be
sustainable back in 2007 was the number of builders that were driving new, tricked
out trucks. Undoubtedly they were making too much.

Regarding the CA, over time you develop the cost curve formulas that fit your
market and you tweek it as you go. When you do new construction or spec homes
you adjust the curve. I gave up years ago on relying on a cost service to pin point
costs, but I love the cost curves they've developed which can easily be borrowed
with power curve correlation and a spreadsheet. I re-check them every few years
and the curve shapes don't change.

It's not about your personal opinion. It's about your PROFESSIONAL opinion based on an unbiased analysis of the MARKET PARTICIPANTS. Much didn't make sense to me. Many times I had cost breakdowns handed to me by builders in support of a contract price some buyer agreed to pay them. I sometimes thought they were nuts. But once I had enough evidence to SOLIDLY prove that's what the MARKET was paying, who the hell was I do disagree? Unsustainable suggests future, not present value. My appraisals were AS OF a specifiic date. With that said, their are boundaries and outliers that should be considered AND REPORTED, which I did and let the lender make the prudent lending decision.

OMG, I sound like a W**H**O**R**E!!

 

[PropertyEconomics]

It's not about your personal opinion. It's about your PROFESSIONAL opinion based on an unbiased analysis of the MARKET PARTICIPANTS. Much didn't make sense to me. Many times I had cost breakdowns handed to me by builders in support of a contract price some buyer agreed to pay them. I sometimes thought they were nuts. But once I had enough evidence to SOLIDLY prove that's what the MARKET was paying, who the hell was I do disagree? Unsustainable suggests future, not present value. My appraisals were AS OF a specifiic date. With that said, their are boundaries and outliers that should be considered AND REPORTED, which I did and let the lender make the prudent lending decision.

OMG, I sound like a W**H**O**R**E!!

Hmmmm so the van down by the river really isnt just a place to escape???

 

[Joyce Potts]

Hmmmm so the van down by the river really isnt just a place to escape???

Hell no, I work out of that van. I like my van. It's just not a George.

 

[PropertyEconomics]

Hell no, I work out of that van. I like my van. It's just not a George.

Or named The .... DAMN I just cant write it ... imagine that .. PE practicing the art of discretion .....

 

[J Grant]

JGrant .. I will throw you one little curve ball ... lets assume there is no developer and the builder is the homeowner acting as their own general contractor.

IS EI/EP still applicable (assuming it is found in your market)???

If EI/EP is typical for market then I would apply it even if the HOW was acting as their own general contractor.

And based on Terrels post and his quote of JGrant ... its interesting ... more and more its sounding like the cost approach is based upon market indicators ... I wonder if that is why the cost approach is one indication of Market Value????

Yes, I agree that we use market data, such as EP/EI to develop the CA value indicator. Whether or not the CA value indicator is market value is up to each appraiser on each report., as the appraiser reconciles it with the other value indicators and decides which of them to weight/rely on for MV opinion.

took a while to answer I was taking a break from posting!

 

[Joyce Potts]

Yes, I agree that we use market data, such as EP/EI to develop the CA value indicator. Whether or not the CA value indicator is market value is up to each appraiser on each report., as the appraiser reconciles it with the other value indicators and decides which of them to weight/rely on for MV opinion.

took a while to answer I was taking a break from posting!

Do you use M&S to develope a CA but invoke the SCP to estimate all forms of D? It is NOT up to the IA to estimate D to derive a well supported MV opinion, IMEVSO, Sir. One sec, I just felt my IUD shift. NVM, I think it was a differential in my right front hubcap.

Discuss.

 

[David Mescon]

Unsustainable suggests future, not present value[/U][/B]. My appraisals were AS OF a specifiic date. With that said, their are boundaries and outliers that should be considered AND REPORTED, which I did and let the lender make the prudent lending decision.

Joyce, thanks for reiterating that very important and often overlooked tidbit. When I lived in Las Vegas and things were booming, we had scads of sale-resale data. There were a number of chronological delineations indicating periods of differing rates of appreciation in given markets and submarkets. As long as both the original market level sale, (i.e., arms length, non-distressed, etc...),and the subsequent market level sale, both occurred within the same "period" I utilized them in my analysis. The spreadsheet I created to do this yielded monthly and annualized rates of straight-line and compounded appreciation, as well as the standard deviation for each. When I had say twenty sale-resale transactions within a given subdivision, all of which occurred within the same "period" there wasn't much to argue about. The rates of appreciation were very well supported, statistically. I utilized these rates in my reports to adjust for changing market conditions. Of course these crazy rates of appreciation weren't sustainable - the cycle of relative stability, moderate appreciation, rapid appreciation, and then rapid contraction has always existed, so there was no reason to believe that run-up would be any different.

My job was to estimate, (and later, opine), as to the value of these properties as of a specific point in time, and factoring in known and well supported rates of appreciation was part of that job. I took a lot of flack for holding firm to that position, hearing the usual crap about how "none of our other appraisers do that" and "we don't accept time adjustments." My response was always the same. I asked them if the market was declining instead of rising, would they want me to report that, to which they always answered with an emphatic yes. I then told them they couldn't have it both ways. I also explained that USPAP, Fannie and Freddie all require me to consider and report changing market conditions, and for me not to do so would be a big no-no. They inevitably relented, but the point is, they really can't have it both ways.

 

[J Grant]

Many times I had cost breakdowns handed to me by builders in support of a contract price some buyer agreed to pay them. I sometimes thought they were nuts. But once I had enough evidence to SOLIDLY prove that's what the MARKET was paying,

What the market is paying is price, we are hired to see if price represents value...a builder handing you a cost sheet and then you confirm that the cost sheet equals value because a buyer agreed to pay the price...did you check resales in the community or similar communities? Pendings and listings and how long on the market and price reducations? Most times, builder upgrades and "packages", including absurd lot premiums, do not hold up on resale prices, so clearly the value is not there, even though a buyer signed a contract for that amount.

Builders often have the first few "Sales" to friends/associates/straw buyers to establish the first critical sold comps they know the appraisers will rely on for price.

who the hell was I do disagree?

You are the appraiser, that's who you are, and your job is to "disagree".. By that I mean, your job is to question, and not automatically agree. Re, no matter the sales contract price or cost sheet a buyer signed off on, we do an independent appraisal , with the result that our value opinion may differ from a builder's cost sheet, or sales contract.

If your value opinion supports contract price, fine, if not, as an appraiser, you have to believe in your value opinion as the more credible.

Unsustainable suggests future, not present value. My appraisals were AS OF a specifiic date. With that said, their are boundaries and outliers that should be considered AND REPORTED, which I did and let the lender make the prudent lending decision.

Present prices can be unsustainable as of effective date, if one takes into account what made the prices too high to be sustained, such as favorable in house builder financing, prices inflated to cover the fact that the buyers are not really qualified (Super low down payment, with cash at closing back that becomes down payment, rolled into the price), lack of informed buyers (buyers paying premiums that are not seen as holding value on resale market), and other factors.