Cost Approach Higher Than Sales Comp

[Mike Seward]

Delivered an appraisal to a new client yesterday. Sales comparison approach came in at $155K. Cost approach was $158K. I came in at $155K.

How would you answer this e-mail?

Is it common to have total cost new higher than appraised value, I'ved pulled several files and none are higher than appraised value?

Can you explain.

THANKS

 

[Lee Lansford]

If there are no appraisal deficiencies, and if the only question is as you phrase it, I would respond: "So what?"

As to you final question...I don't understand exactly the question that you are asking. Would you please rephrase the statement and question?

 

[Mike Seward]

Sorry about that. Poor wording. The e-mail came from a processor who was asking me to explain to her, "Is it common to have the total cost new higher than the appraised value? She went on to say she had pulled several appraisals (done by other appraisers) and none have the cost approach value higher than the appraised value.
Then she asked, "can I explain"

 

[David M. Andrews]

Tell them that Cost does not necessarily reflect Value Contribution (you will then probably have to explain Value Contribution). It is not uncommon for Cost to slightly exceed the Value estimate, especially when the Market is given the most weight. It is common for Cost to equal value when an appraiser manipulates the cost data to reach a "target" value. An honest and competent appraiser will most likely produce Cost Approach results that tend to slightly exceed the overall value estimate in most cases.

 

[ccooper]

In my market, cost is almost always less than sales for residential. I do not believe a step up in quality is my issue. I believe that there is an inherant value in building (entre. profit???) in my market. If cost were always more than sales, why would builders construct "spec" houses.

It may be a factor of my specific market, we have a lot of out of state buyers which probably don't want to wait or can't baby sit a contrator for six months from out of town. Would make an interesting poll though (if I knew how to do one).

 

[StephHigdem]

Our standard answer is something along the lines of "Why would you buy it for more than you could build it for?"

 

[Michael Tipton]

Mike,
Can it be attributed to increasing vacant site prices in your market?

 

[Barbara Decker-Spence]

Originally posted by Mike in Tampa@Nov 2 2005, 11:23 AM
Delivered an appraisal to a new client yesterday. Sales comparison approach came in at $155K. Cost approach was $158K. I came in at $155K.

How would you answer this e-mail?

Is it common to have total cost new higher than appraised value, I'ved pulled several files and none are higher than appraised value?

Can you explain.

THANKS

This is less than a 2% difference in value estimate by sales comparison and cost approaches. I'd point out that the difference is well within acceptable margins and that typically the cost approach will produce a value that will exceed or equal the sales comparison approach.

 

[Mike Seward]

Thanks for your replies.

 

[Ted Martin]

Both value indications appear reasonable and are mutually supportive.