Cost Approach Lower than Sales Approach

[Grace]

What is the acceptable percentage difference between the cost and sales approaches? My cost approach is $271,800 and sales approach is $289,500, a six percent difference.

I was very happy that I came that close between the two, considering the I used Marshall Swift but the underwriter is questioning the difference, wanting it closer.

 

[DJBanas]

Grace:

There is no "acceptable" percentage difference. The cost approach can give you a higher, lower or the same value as the sales approach. As long as your conclusions are valid and supported tell the UW that "it is what it is".

Good Luck

 

[Chris Colston]

Are you sure you have figured the site value correctly or maybe the on-site improvements are not being fully realized??

Besides who says the Cost Approach HAS to be higher than the Sales Comparison Approach? ( as I put on my asbestos suit:new_ukliam2: )

 

[Pamela Crowley (Florida)]

I've rarely had the Cost Approach come in at or higher than the Sales Comparison for the past couple of years. It couldn't keep up with the sales increases. I've just commented on that and never had it questioned.

If the UW doesn't like it, s/he can reproduce it on their own to whatever they want it to be. No, unless you can find a mistake on your part, I would hold with what you've already delivered.

 

[CANative]

The question is "What is the market value?"

The answer is that the sales comparison approach is the best method of appraising residential property as it is a direct reflection of market activity. The cost approach is an indirect method.

 

[bart nathan]

Is this Replacement Cost or Reproduction Cost?

 

[Grace]

Bart

I'm using replacement cost.

 

[Willie]

I've rarely had the Cost Approach come in at or higher than the Sales Comparison for the past couple of years. It couldn't keep up with the sales increases. I've just commented on that and never had it questioned.

If the UW doesn't like it, s/he can reproduce it on their own to whatever they want it to be. No, unless you can find a mistake on your part, I would hold with what you've already delivered.

Pamela, if you'll stay with your appreciation rates, and keep up with the land sales a bit closer, you'll be a little closer anyway. Also, keep in mind that often M & S is 3 month old info while construction costs could jumped in the prior 3 months dramatically. All this together can really get you off a bit. Say you have 6 month old sales of homes, your site sales are 6 months old, and your m& s is 3 months, it can make a big difference.

Easier said than done.

 

[Pamela Crowley (Florida)]

Naw, the builders would contract to build for less than the speculators have been selling the new contruction never been lived in ones they contracted for 6+ months ago. The Costs Approach for new as of the effective date of the appraisals really was lower than the Sales.

 

[CANative]

Will,

I just got back from inspecting a manufactured house for a purchase transaction. $175k. Although there are only a few sales in this isolated community in any year, there are enough to show that $175k is not unreasonable.

But, there are tons of recent sales of lots. Some sales only a few weeks old. I just did an appraisal of an almost idential lot just 3 weeks ago. The land value is $60k. Doing a quick CA in my head while I was driving back it adds up to:

$60k for the lot
$30k for the depreciated 1988 Sandalwood MH
$10k for the garage
$20k for foundation, hookups, drive, grading, setting, permit, fees and taxes etc.
$7.5k for decking, minimal landscape, and flatwork
$12k +- for marketing & misc.

$139,500.

Even if you figure 15-20% EP or developer profit for the new MH's in this community, that only adds up to $160,000 - $166,000 max.

Now what?