Cost Approach and those who "mail it in"

[The Bob]

Page 2 of Introduction in M&S states....

Included in Costs:

#6) Contractor's overhead and profit......

The part about ep not included has to do with layout and planning of large land developments

 

[Jambalaya]

I regularly use external economic obsolesence. Not many appraisers do though. I recently had a reviewer ask for supplemental data on it, because he has never seen it used before.

 

[Tim Hicks (Texas)]

Not all areas have EO at this time. Just you overinflated appraisal states. LOL

Actually, EO is determined by sub-markets here.

 

[J Grant]

This was explored in another thread a few weeks ago...is the CA better with inclusion of EO? It can yield very diff values when using EO or not. EO is local to market areas , unlike physical depreciation which is similar in most areas and not market dependent. Functional obs is individual by floorplan or inadequacy of structure etc and is a physical characteristic, as is ext such as backing up to a heavy use traffic road.

The EO, if present, is evident in the resale prices on the report and in market conditions discussed througout the report. There is a case for using it in res RE and a case for not using it in the cost approach. Seems many appraisers are not using it, but after the last thread I do understand the reasons for applying it, still not am sure if applying it makes a cost approach more or less accurate, as it throws the final indicated CA value off than if not included...making th e indicated CA vlaue close to the indicated value derived from from the SCA, whether or not the users of appraisal are better served by having the values line up or seeing the market forces at work from the diff value indicators ....???

 

[Lee Lansford]

Page 2 of Introduction in M&S states....

Included in Costs:

#6) Contractor's overhead and profit......

The part about ep not included has to do with layout and planning of large land developments

Yes, EP, or, EI, are not the same as "contractor's...profit". There may be contractor's profit available, but, no EP/EI.

 

[Terrel L. Shields]

The sale of a new property will have the "EP" included. So subtract out the cost of the land and you have the cost of the building. If EP exists then that figure will be higher than the cost to construct with the remainder being EI/EP.... have fun...

 

[stangtime]

I was getting ready to post a CA question when I saw Terrel's post this morning. Every review I get seems kinda loosy-goosy when it comes to the CA. I like to spend a little more thought on it as I'm working my way through the report. Stepping aside from the EP or EI argument for a moment, I have downloaded the Craftsman Cost Guide to try it out. Cost $38.95 and was downloaded in a few minutes.

It is a very easy program to use. I tested the figures from it against my current (but expiring Marshall & Swift book - that goes dead this month). The cost for the above grade areas appear pretty close to the M&S numbers, say, within a few % but the basement areas seem off. The Craftsman guide said the lower level of a three-level split, unfinished, with approximately 575 s.f. was close to $40.00 s.f. M&S has always been around $25 for this area.

Dan

 

[J Grant]

The sale of a new property will have the "EP" included. So subtract out the cost of the land and you have the cost of the building. If EP exists then that figure will be higher than the cost to construct with the remainder being EI/EP.... have fun...

I think this is risky because it isy backing into the cost approach and assuming the new home sales price is legit and is market value...is the sales price inflated due to builder financing, cash back, is the buyer legit buyer or investor, are the new home sales prices in the community supported by resale listings in the community and competing outside new and resale homes that are similar?

You have to do the cost approach as the cost approach, what it costs to build in area, including contractor profit and cost of land best as can by land extraction. The problem with the CA is there is no separate line for "market appreciation", or ent profit/incentive...is it supposed to be in the CA? And if it is can you simply add in endless amounts of EI/EP to match the sales price? What if EI/EP is based on sales prices that are not supported by the market?

This is the risk when appraisers start adding in market forces with cost figures and true locational ext obs in the cost approach...they either start backing into the CA to include enough EP to make the number work or backing out of it by adding enough OP to make the numbers work...the market forces are already accounted for throughout the appraisal in either rising or falling prices, supply/demand, comp homes sale prices, listings etc....is extracing appreciation/depreciation per market and then sticking it in CA appropriate, if the EP is irrational exuberance or based on flipping etc? And what if the EO is based on flopping and investors profiting off low values? Is the CA supposed to be a "brake" against the acceleration of the appraisal toward market forces, re a reality check for users of the appraisal, or just another market value indicator neatly lining up with the SCA?

When markets are in balance, when builder profits are healthy but not based on huge cash back, builder financing only, selling to straw buyers to set the first sale prices etc...then the contractor profit in MS is actually enough or close to what the homes are selling for. When resale prices go crazxy high, real legit builder profits rise but actually lag behind resale prices, unless the new home prices are unsustainable, which is what happened at market high 2005-2007.

When resale prices fall below economic indicators and are a crash due to prior too rapid acceleration, the builders cannot make any profit and abandon building in the area and go bankrupt etc...here and there a spec home but most new construciton is halted.

 

[PropertyEconomics]

JGrant .. I think you missed the purpose of Terrels post .. it was not about development of a cost approach it was about determination of actual EP ... and it is absolutely the correct way to approach the situation. You just have to think a little about what he has stated.

 

[J Grant]

PE...that word "Correct"...please re read my post. There is a problem using his mehtod to the cost approachs, simply subtracting the land from price and the remaining is cost to build plus PE. Yes, the subjtracion "determins the PE...but is the PE legit, and should it simply be stuck back into the cost to build (which is what you and he are adovcating....you can't separate an appraiser deciding to hunt for PE, then simply subtracing it from a sales price that may or not be market supported, and sticking it back into the cost to build to support market value. I don't know if any of this is correct, it seems like a way to prop up a higher than typical cost to build by simply attributing it to EP/PI, for which there is no sep line in CA, and MS and other cost tables already factor in builder/contractor profit...if there is more local legit typical profit that is not over MV that is one thing, but changing each CA to match whatever PE is making a sales price...is that correct?

It is backing into the CA to find the supposed PE/PI...instead of the proper development...land extraction, cost to build including contractor/builder profit. Now, is there a difference between that and new home price? You are adovcating, if a difference, just claim it is PE and stick it back into the cost to build figure, which raises it.

I am saying taht it may not always be responsible to simply add in the difference as PE/ because the new home sales price of subject may not be supported in the market, or be inflated for many reasons...builder cashback, builder financing where they "control" most of the appraisals and the clueless outside appraisers base their values on all builder new home sales, , are the new homes sales holding up against resales of newer homes in community and so on.

Check if the new home subject sales price is market supported before assuming the PE is legit and should be added into the cost to build.