Cost Approach - FHA

[Art Kempf]

I'm completing an FHA appraisal and am asked to complete a cost approach. This is a new home in a large development which is located in a very depressed market. After calculating the relacement cost of the improvements I find that replacement cost alone exceeds the estimated value without adding a land value. How should this be handled? Can there be negative land value? Should the cost approach value be reported @ some 15% over the value estimate? ... Thanks!

 

[Michigan CG]

The Cost Approach is what it is. Sounds like you have some serious external/economic obsolescence.

 

[Mr Rex]

What Tim said. If you want to make the Cost Approach come closer to the SCA, apply a lump sum External Depreciation adjustment and explain that is due to current market conditions.

 

[William K]

Ditto Mr. Evans response.

If it is New construction talk to the builder maybe they can give you some info/ insight on what their costs are like in todays market

 

[Dirty Harry]

I'm completing an FHA appraisal and am asked to complete a cost approach. This is a new home in a large development which is located in a very depressed market. After calculating the relacement cost of the improvements I find that replacement cost alone exceeds the estimated value without adding a land value. How should this be handled? Can there be negative land value? Should the cost approach value be reported @ some 15% over the value estimate? ... Thanks!

Sounds like the builder is dumping their existing inventory at below cost. From what I have heard builders are in big trouble and defaulting on their construction loans left & right. They are part of the bad loans on the banks books these days!

I'm not sure it would be appropriate to make a market adjustment for external depreciation. We are talking what it would cost to reproduce the home new, not what it would sell for in today's market.

As Tim stated, "The Cost Approach is what it is."

Just my 2 cents!

 

[Mztk1]

All too common now. I usually find the cheapest lot available (there are no solds) in the market and apply that as my land value. Explain that that is the lowest price that a lot could be purchased for immediately in the area (even if it is outside of a PUD), and then the difference between the results in the cost approach and the results in the sales comparison approach is due to economic depreciation.

M&S carries between 10 and 20% of contractor's variable costs and profits. The difference typically falls below 20%.

Also, be sure in year built on the first page you put month and year completed, not just the year.

 

[VolcanoLvr]

The greatest criticism of the CA is that the numbers can be fudged to make the report look better.

Don't do it. (Fudging #'s)

Report a supportable unimproved land value, + cost of utilities, then add the true costs of construction.

Per the others: It is what it is.

 

[Vivian Bachner]

"depressed market" -External/economic obsolescence

 

[Kevin A. Spellman]

Economic Obsolescence is always incurable and it’s only applied to the improvements in the cost approach. Any loss in value to the site should already be in play with the estimated market value of the site. I would review the offerings and recent sold to apply a percentage in the cost approach and not a square foot analysis. A percentage adjustment will always work in all market conditions. These types of assignment do create better appraisers if they are done reasonably and if they are understood.

 

[Art Kempf]

Thanks all - your imput is helpful and appreciated