Cost Approach Lower than Sales Approach

[CANative]

Will, let me consense your post a bit:

Buyers would rather buy than build.

 

[Willie]

If one was willing to wait for the house to be built, they could get it for less than what the new speculator owned, vacant, and for sale properties had been going for.

So Pamela, what you have is a premium on existing new homes, which would mean there is an immediate influx of people who want these homes now and ar not willing to wait for the builder. The builder, is hedging on having a guaranteed profit, at a lesser price, by contracting immediately with a speculator. Just thinking out loud. Hope I don't here a poof all the way up here in Tennessee, and likely I won't, as I don't expect to. Remember, there are 1,000 people of day moving to FL, and this creates opportunity and inefficiency in it's own right.

What do you think?

 

[Willie]

Will, let me consense your post a bit:

Buyers would rather buy than build.

Many do not have any choice as they have to move fast. Again, it sounds like a growing market, with people moving in regularly, maybe from Southern Cal?

Those who do have the time or patience to build are paid handsomely, in equity for the owner occupied or profit for the developer, which is why I think you should be taking advantage.

Am I thinking of this right? It sounds to me, that it's a headache to build there, or you would be doing so too, given the numbers, and hence the high EP, for those who are willing to put up with the hassle. Sounds like good money, at 25% but plenty of headaches. I'm not sure what those headaches are, but being a conservative person and businessman, I'm almost sure that they are government related, local and maybe state.

 

[CANative]

It's a little development about 7 miles out from town in the middle of nowhere. Maybe 500 homesites. It's been there for 30 or 40 years. Mostly MH's now. there are about 6 or 7 sales a year. There have been 6 or 7 sales a year for as long as I've been appraising. There are about 15 listings of new MH's. There is an oversupply at this time due to speculators.

 

[bart nathan]

Here is a little blurb I got from the FHA 4150.2 booklet.

Cost approach

THE REPLACEMENT COST OF PROPERTY IS ESTIMATED TO ENABLE THE APPLICATION OF THE SUBSTITUTION PRINCIPLE. ESTIMATES OF THE REPLACEMENT/REPRODUCTION COST OF PROPERTY ARE NOT ESTIMATES OF VALUE, ALTHOUGH THEY INDICATE THE POSSIBILITY THAT VALUE, IN AN EQUIVALENT AMOUNT, MAY EXIST. VALUE DEPENDS ENTIRELY UPON USEFULNESS, NOT ON THE COST. VALUE TENDS TO CONFORM TO COST, BUT THIS IS NOT TO IMPLY THAT IT IS ALWAYS EQUIVALENT TO COST.

 

[Willie]

There is an oversupply at this time due to speculators?

So there is not an influx as I was guessing? What happens when the speculators start cutting prices? Has there been a skippy aiding them along and therefore convoluting your estimate/appraisal, making you a hapless victim to their skippydom? Speculators do this you know?

Rest well tonight. LOL (Can't figure the smilies out.)

 

[Mike Garrett RAA]

I would say about 90% of my cost approach values are somewhat less than the sales comparison approach. Could it be I am not considering sufficient builder profit in this market?

 

[JSmith43]

I would say about 90% of my cost approach values are somewhat less than the sales comparison approach. Could it be I am not considering sufficient builder profit in this market?

If I had measured 3 sides of a rectangular building accurately, I wouldn't be afraid to "back into" the dimension used for the 4th side. Backing into a figure in such situations represents good deductive reasoning, and would make Sherlock H. proud

In other words, that or something else that is short, Mike!

Of course, maybe the cost approach is spot on and your sales comparison approach results are consistently high. I can't remember if you are a cost approach advocate, but for those that are, I would assume that the part that is 10% off might be the sales comparison approach (not):icon_smile:

 

[Karl]

1,000 a day to Florida 1,000 a day to Nevada 2,000 a day to AZ so how much they want for the Vacant state of??. now that it must be empty, Now that the "Investors are in new Mexico & Arkansas, Bet we'll be seeing 1,000 per day for those 2 states shortly.

BUT wait the Phoenix Metro area had 3,400 March 3rd 05 7 NOW has 34,000+/- homes for sale March 3rd 06. Guess our 2,000 per day are already going to New Mexico & Arkansas.

 

[Elliott]

Rog,
You may have let slip that UWs are on to us.
Here's how we mess with their heads....sometimes
we come in under on the CA, and sometimes we
come in over on the CA....sometimes we come in
pretty close. That's why we can always say its
not applicable and we relied on the MA.

elliott