Cost Approach In New Construction

[Michigan CG]

So are you suggesting that I should refrain from mentioning "Soft Costs" at all costs? Couldn't resist the pun

But heck, now that you have brought it up.....................I am not sure how many residential cost approaches you see but I find it humorous how some will back into the Cost Approach to make it match the SCA when they are actually off by about 20% considering those soft costs. How many heads would explode if they were told this?

 

[Terrel L. Shields]

How many heads would explode if they were told this?

One Rez CA I saw couple years ago had RCN of $50.00 . REALLY? No one was building for that or could have. The missing element was external market forces. Economic obsolescence caused by too many houses on the market with distressed pricing.

 

[George Hatch]

I just saw a cost approach for a new construction project where the appraiser simply parroted the construction cost breakdown from the contractor without checking their own data or adjusting the costs to include items that are not included in such a cost breakdown but which do go into an appraiser's Cost Approach to MV. Developer profit being one of the big omissions.

IMO half the problem in this discussion is that the cost approach section of the Fannie form is abbreviated and most of you guys have never had to individually develop some of the elements of the aggregate price/sf. That form has contributed to a lot of bad habits.

I guess a discussion of the difference between the cost approach to MV vs Insurable Value is out of the question, huh? .

 

[Tim Hicks (Texas)]

Honestly, a M & S 1007 form or Swift Estimator form addendum would be much more worthy than the cost form on the URAR, but some underwriters or checklister's head would explode trying to understand them. The cost approach is only an estimate of costs, not actual costs. We all know that even the builders cost sheet is full of holes or padded costs.

 

[Howard Klahr]

I guess a discussion of the difference between the cost approach to MV vs Insurable Value is out of the question, huh? .

What specifically would you like to address?

 

[George Hatch]

Well, I was actually addressing that comment to the SFR appraisers. I know that the commercial appraisers are mostly familiar with the distinction because we deal with it on a more regular basis.

 

[CANative]

Typically the residential cost section state that the source of the information is Marshall and Swift and it is typical (if one actually uses it) to put in the estimate by Marshall and Swift and also the quality and condition ratings. The reader should be able to replicate where the numbers come from. If the appraiser delves deeper than most into the approach then it is likely that the appraiser would comment on that.

I include a multi-up listing print out for land sales (or a table of land sales with a reconciliation) in the report. I also copy the cost estimator from building-cost.net with a summary of the parameters so a reviewer can replicate the numbers exactly.

 

[Don Clark]

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?

It is not required by VA, FHA or Fannie Mae. Something gells me that they do not consider it necessary. It may be applicable, but not necessary. No one makes a loan on the basis of the cost approach, or the income approach for that matter. It then boils down to a personal choice by the appraiser or the client.

 

[CANative]

If the client does not consider the appraisal credible without the cost approach then the appraisal is probably not worth of belief and the CA would be considered necessary. The appraiser is a fool to push back so hard on this reasonable request.

 

[BRCJR]

I understand page 28 of 34 in Freddie Mac guidelines indicates the CA is not required but, someone must be teaching this position as it has been an issue twice in the last two weeks for me (lender employee).