Cost Approach and those who "mail it in"

[David Mescon]

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)

I'm so not good at shutting up...

Answer: 'cause EI is part of the cost to build. Just because some folks are owner-builders doesn't mean all people are. Let's say, for example, Joe Blow builds a house for his family. Let's assume, for the sake of simplicity, that the market is reasonably stable. Six months after completion Joe gets transferred out of state and they have to sell the home. Do you think Joe will sell his house for only the actual dollars he has in it? Not likely.

Tangential but relevant scenario number two: Joe built his house himself - literally. He did not use a contractor. He did not use subcontractors - he actually did all the work himself. When you appraise Joe's house would you eliminate the contractor's profit from the CA because Joe didn't use one? Would you alter the costs to reflect materials only because he did all the work?

Wait - there's more. Joe owns a chain of building supply stores. He got the materials to build his house very cheap. Would you adjust the building costs down in your CA to reflect Joe's rather unique ability to get materials for very little money?

See where this is going?

 

[J Grant]

The cost is the cost and profit is an element of cost.

The buyer is not building a house. He's buying it from someone who took the risk and built a house.

But the CA is a theoretical cost of building (reprod or replacement) of the subject, not a theoretical price of purchase of the subject as a new house from someone who took the risk to build it (which would indicate a purchase price of a new house)

If you don't put in EP you don't get MV... you just get the cost of the bricks and sticks. The SA is a direct method of developing a value. The CA is an indirect method.

The problem is nobody knows what real builder/developer EP is, even a survey, like they are really going to divulge their true profit and losses. They state corporate genric averages that make good public relation sound bites.

Developer actual EP varies from month to month, from quarter to quarter (which is why so many builders go belly up, even they can't predict it). So we get our own version of EP from subtracting from our own SCA opinion of value...an indirect approach is a good way to describe it...but you make some good points of course!

 

[CANative]

But I make some good points?

*sigh

You can't develop an estimate of EI in a single assignment. It takes doing the CA over and over and over again and putting a lot of thought into it and understanding all of the elements. And even then the best you're going to get is "a reasonable amount of profit."

You make adjustments for GLA, for garages, for lot sizes, yes? Do you struggle with finding true matched pairs to analyze each and every time you have an appraisal to do? No. You keep tabs on these numbers or ratios or percentages and then apply them. Same thing with the cost approach.

When I was a noob I had to use "the list" I inherited from my mentors (bro and dad.) But where did they get the list? The developed it over years and years of struggling. Eventually I learned how to make my own list.

 

[Joyce Potts]

See where this is going?[/quote]

I'd go to Disney World but they don't serve Vodka before 11:00 a.m.

 

[Mr Rex]

JGrant, are you or have you ever been blonde?

 

[J Grant]

But I make some good points?

*sigh

You can't develop an estimate of EI in a single assignment. It takes doing the CA over and over and over again and putting a lot of thought into it and understanding all of the elements. And even then the best you're going to get is "a reasonable amount of profit."

You make adjustments for GLA, for garages, for lot sizes, yes? Do you struggle with finding true matched pairs to analyze each and every time you have an appraisal to do? No. You keep tabs on these numbers or ratios or percentages and then apply them. Same thing with the cost approach.

When I was a noob I had to use "the list" I inherited from my mentors (bro and dad.) But where did they get the list? The developed it over years and years of struggling. Eventually I learned how to make my own list.

Your way makes sense, add a reasonable market derived EI/EP, it sounds like your amount is fairly stable ( that is actually what I do, add a small, moderate amount of EI in the CA esp with new homes, in reprod of an older home I may not add it)

The issue is when the market starts rapidly declining or rising, do you change your EI to move with the market, or do you leave it as a reasonable expectation of EP, for the purposes of developing a theoretical cost, and don't adjust it large amounts to match big market swings in price (adjusting it would close gap between SCA and CA value in volatile markets, not adjusting it would leave the CA as a more stable marker of cost to counteract the SCA value)

 

[J Grant]

JGrant, are you or have you ever been blonde?

Only my hairdresser knows for sure!

 

[J Grant]

I'm so not good at shutting up...

Answer: 'cause EI is part of the cost to build. Just because some folks are owner-builders doesn't mean all people are. Let's say, for example, Joe Blow builds a house for his family. Let's assume, for the sake of simplicity, that the market is reasonably stable. Six months after completion Joe gets transferred out of state and they have to sell the home. Do you think Joe will sell his house for only the actual dollars he has in it? Not likely.

Tangential but relevant scenario number two: Joe built his house himself - literally. He did not use a contractor. He did not use subcontractors - he actually did all the work himself. When you appraise Joe's house would you eliminate the contractor's profit from the CA because Joe didn't use one? Would you alter the costs to reflect materials only because he did all the work?

Wait - there's more. Joe owns a chain of building supply stores. He got the materials to build his house very cheap. Would you adjust the building costs down in your CA to reflect Joe's rather unique ability to get materials for very little money?

See where this is going?

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.

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.

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 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:

 

[David Mescon]

Only my hairdresser knows for sure!

..........

 

[CANative]

I do, add a small, moderate amount of EI in the CA esp with new homes, in reprod of an older home I may not add it)

But in the CA you are building a new home to start out. Then you have to adjust the costs for the depreciation. EI is a cost that is subject to depreciation.