Cost Approach In New Construction

[lpugh]

I am a reviewer for a federally insured bank. In this particular assignment, because there was new construction involved, we requested that the appraiser include the cost approach in his analysis. The appraiser argued that no one considers the cost approach anymore. It's not the first time that we've heard this statement, but other appraisers have complied. We're okay with them stating that they do not give weight in their final opinion of value to the cost approach if another approach to value would be more likely considered by market participants. On new construction or substantially remodeled properties, our regulators like to see the cost approach considered. This appraiser flat out refused and required a lot of hand holding to get a somewhat acceptable report. (There was no direction/influence on value. We wanted to have the report to show consideration of this approach and why or why not this would be supported by the market.)

Has anyone else come across this issue with the cost approach on new construction?

 

[Terrel L. Shields]

The appraiser argued that no one considers the cost approach anymore

Fire them. USPAP has not changed. All three approaches are REQUIRED to be considered , and if applicable but not necessary can be excluded. But the client can still ask for it, and it is still appropriate to do the cost approach on new construction. Your appraiser is frankly incompetent if he/she insists it is no longer used.

 

[Michael S]

Sounds like a lazy (and possibly incompetent) appraiser. I can't really think of a situation where new construction would not necessitate completing the cost approach.

 

[lpugh]

I appreciate the feedback. We've had other appraisers tell us that market participants would not consider the cost approach in valuing a property with new construction, but still give some sort of cost analysis - whether it's using M&S or comparing the developer's budget to other similar projects that they've appraised recently. I'd like to report the appraiser for this assignment to our state licensing because he was late on completing the assignment, increased his fee after accepting the assignment (he was given the information prior to accepting the assignment), and was very slow to respond to corrections (there were other issues in the report). While he ultimately addressed our concerns, it's taken 2 additional weeks for the review process because of his slow responses. Is this something that we can report?

 

[bnmappraisal]

we requested that the appraiser include the cost approach in his analysis. The appraiser argued that no one considers the cost approach anymore.

One of two things, IMO, should have happened.
1 - the appraiser should have declined/backed out of the assignment b/c of differences in assignment conditions (i.e. client requiring the cost approach)
2 - the appraiser should have accepted the assignment, and even IF felt the cost approach was not applicable/necessary, since the client is requiring it, completed the report with a cost approach

Unless #2 would lead to a misleading report, which frankly, I would doubt since the subject is a new construction property, then the appraiser should complete the CA per assignment conditions/client's request.
if the appraiser is that against the cost approach, the appraiser should choose #1 ... just my $0.02

 

[Terrel L. Shields]

I'd like to report the appraiser for this assignment to our state licensing because he was late on completing the assignment, increased his fee after accepting the assignment (he was given the information prior to accepting the assignment), and was very slow to respond to corrections (there were other issues in the report). While he ultimately addressed our concerns, it's taken 2 additional weeks for the review process because of his slow responses. Is this something that we can report?

definitely. The board will straighten him out about the cost approach.

As for other appraisers saying "the market" doesn't accept the CA for new construction is also bunk. Many buyers are very conscious of "prices" and costs of lots and building costs. The problem is FHA and Fannie Mae leaving the impression that the CA is worthless and NOT accepting any appraisal where the CA is weighted. That is one reason why I refused to do any work for FHA or Fannie all these years. They are basically trying to dictate the methods when those should be left up to the appraiser to consider and decide for themselves and defend their decision with logic and evidence.

 

[Michigan CG]

.................. We've had other appraisers tell us that market participants would not consider the cost approach in valuing a property with new construction, but still give some sort of cost analysis - whether it's using M&S or comparing the developer's budget to other similar projects that they've appraised recently.................

The report is not written for market participants, it is written to protect the client, in this case the lender.

I am sometimes very blunt (warning). The appraiser is an idiot. Any appraiser who doesn't develop the cost approach for new residential construction is also an idiot. If you are facing this regularly then you may want to think about the vetting process of the appraisers on your panel.

Another depressing thing to think about is many appraisers do not know how to properly complete a cost approach. When an appraiser cites that they use Marshall and Swift but the numbers are all in whole dollars they are many times being dishonest.

I don't know where you are located but if the appraiser states they are using extraction or abstraction for their land value there is a good chance that is also a fib as many have no idea how to do either.

 

[BarrySW1963]

I appreciate the feedback. We've had other appraisers tell us that market participants would not consider the cost approach in valuing a property with new construction, but still give some sort of cost analysis - whether it's using M&S or comparing the developer's budget to other similar projects that they've appraised recently. I'd like to report the appraiser for this assignment to our state licensing because he was late on completing the assignment, increased his fee after accepting the assignment (he was given the information prior to accepting the assignment), and was very slow to respond to corrections (there were other issues in the report). While he ultimately addressed our concerns, it's taken 2 additional weeks for the review process because of his slow responses. Is this something that we can report?

I would not. Late delivery is not a USPAP violation. Asking for more money when the SOW is determined to be more than anticipated is also not a violation, particularly when new construction often has hidden surprise complexities. Slow responses should be handled as a business decision (to keep or not keep on the panel).

Why not point him to the forums and tell him to read the opinions here on the applicability of the CA, so he gets it right going forward?

 

[BarrySW1963]

....Another depressing thing to think about is many appraisers do not know how to properly complete a cost approach. When an appraiser cites that they use Marshall and Swift but the numbers are all in whole dollars they are many times being dishonest.....

Hold on there now.

The fact that M&S spits out cost to the penny suggests the input was comprehensive enough to result in cost to the penny per square foot. I can tell you with absolute certainty that no one has sufficient information to feed to swiftestimator (or to look every item up in the M&S book) to actually professionally rely on the resulting costs to the penny per square foot. It's as if we completely ignore all concepts of handling significant digits just because the book and the app give us those pennies.

I have been wondering if it's actually dishonest to report the cost approach to the penny, because doing so implies you actually have much much much more reliable input data that you actually have.

 

[J Grant]

If you don't like using this appraiser, don't continue to use them in future...but why report them to the board since at least per what is posted they did not violate USAP?