Cost Approach In New Construction

[BRCJR]

I have reviewed, lender loans in-house and secondary market, for almost nine years. The most abused portion, my experience, of an Appraisal Report is the Cost Approach to Value.

 

[BRCJR]

Attached is a repair estimate a friend completed, although not exactly what alintx is seeking.

Looks like a BuildingCost.net product.
Ever compare that to a M&S developed cost analysis?

 

[lpugh]

I appreciate everyone's input. There were far more responses than I expected. I opened it up for discussion because I know that a factor in your scope of work is to consider what your peers would do. Despite the mixed comments, you all provided valuable insight into the situation. Thank you so much!

 

[Michigander]

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.

Anyone looking at buying a new house is looking at cost. The appraiser sounds like a total idiot to me.

 

[Terrel L. Shields]

What do you think the spread will be?

If you intend to do a REPRODUCTION cost approach, fine. You need exact numbers. That isn't necessary with REPLACEMENT COST. You are constructing something that is a proxy for the subject, not rebuilding the subject. The same utility does not imply an exact replica. The numbers are what they are. And using the cost approach in reverse to extract costs, land values, and depreciation for the comparables provides a baseline number. It's part of the unity of application theory.

Further, if I know what it cost to build a house on a lot of known cost and that was 4 or 5 years ago, using the historical multiplier works reasonably well. That too is a method of appraisal via the cost approach but I rarely hear of an appraiser who even looks at this method and many seem ignorant of it despite being in almost all cost books. Ditto the assemblies method.

Here is the short form of a CA... 3plex from 2013 not is great shape. I cut out the explanatory parts of the land sales and source info. The form is a printout using Natl Bldg Cost software that comes with the book.

 

[George Hatch]

I've compared Building-Cost.net and the Craftsman books to M&S and the results seem to correlate pretty closely overall. Personally, I think the Craftsman formats are easier to use in terms of narrowing down the refinements. They all understate the indirect costs in my region but that's a simple tweak to make.

I run into contractors on a regular basis, and I also review contractor cost breakdowns in new construction so I use that info as context and as a check for the published data.

Everything we do involves the use of assumptions and the corresponding limitations that go with those assumptions. So I don't allow the limitations of the Cost Approach to get into my head any more than the limitations of the Income Approach when applied to market segments that are not driven by those types of buyers.

 

[George Hatch]

Good gravy Terr, actual site sales data and a reconciliation in support of your opinion of site value. What'll they think of next?

 

[Amy Perkins]

If you want the cost approach make it a part of the assignment condition. They want the cost approach to verify that the subject is properly insured. Sometimes an insurable value is given. If you want it ask nicely for it, if he won't do it find someone else who will.

 

[Tom D]

I have reviewed, lender loans in-house and secondary market, for almost nine years. The most abused portion, my experience, of an Appraisal Report is the Cost Approach to Value.

seems like a good reason not to include it, if not asked for. with residential can some of you tell me how close your new, newer construction cost approach number is to the appraised value. always higher, close to it, or lower by how much normally, or percentage. i'm serious in asking this question. i don't like the cost approach, especially if you don't have similar lot sales. i've built & rehabd houses, i just don't like it on the residential form. well, at least in my older urban areas. thanks in advance for giving me your experience on the cost number verses the appraised value.

 

[Howard Klahr]

My point is use the cost manuals and use their figures because that is your source.

The source is M and S and if the source says $91.26 then I am going to put in $91.26.

And how do you gentlemen approach interpolation which is an accepted methodology in utilizing the cost service which you reference?