Cost Approach Supporting Market

[Sapphire4214]

I am a newly Licensed Appraiser and now that I am on my own am realizing my supervisor/mentor might have been a little off when instructing me on a few details. I have a new construction. Simple Q4 standard spec home. Everything including the site value which was derived from the market analysis is lining up perfectly. I have 4 great comparables that I am less than 5% Net and Gross across the grid on adjustments. I ran a Cost through Marshall & Swift Cost Estimator and it actually falls in line with the builders quote (plus Market derived site value).

With that said, my supervisor always told me to make sure my Cost Approach was more than the market so that you can say it was Fully supported. So in this instance I am at 222,000 cost with the market indicating 249,000. Back when I was a trainee his resolution would be to up the price per square foot the amount it takes to get to the market value. All the while training, I did this under his name because it was under his umbrella. Now that I am doing my own report I can see that is just does not seem right. I am in no position to question him now so I am coming to this forum for advice. I have found cold calling other appraisers in the area result in "I'm not involved and don't want to be" lol.
Basically, I just want to know if it is OK for the Cost to be less than the market as long as I do not use any of the percentage in the reconciliation since the Market is always the best indicator.

 

[J Grant]

I am a newly Licensed Appraiser and now that I am on my own am realizing my supervisor/mentor might have been a little off when instructing me on a few details. I have a new construction. Simple Q4 standard spec home. Everything including the site value which was derived from the market analysis is lining up perfectly. I have 4 great comparables that I am less than 5% Net and Gross across the grid on adjustments. I ran a Cost through Marshall & Swift Cost Estimator and it actually falls in line with the builders quote (plus Market derived site value).

With that said, my supervisor always told me to make sure my Cost Approach was more than the market so that you can say it was Fully supported. So in this instance I am at 222,000 cost with the market indicating 249,000. Back when I was a trainee his resolution would be to up the price per square foot the amount it takes to get to the market value. All the while training, I did this under his name because it was under his umbrella. Now that I am doing my own report I can see that is just does not seem right. I am in no position to question him now so I am coming to this forum for advice. I have found cold calling other appraisers in the area result in "I'm not involved and don't want to be" lol.
Basically, I just want to know if it is OK for the Cost to be less than the market as long as I do not use any of the percentage in the reconciliation since the Market is always the best indicator.

yes it is okay for the CS to be lower, to avoid manipulating the CS -

 

[Sapphire4214]

yes it is okay for the CS to be lower, to avoid manipulating the CS -

Thank you for your reply. I am accustomed to just stating the "Cost Supports the market". What comment would I make on this particular situation?

 

[J Grant]

Thank you for your reply. I am accustomed to just stating the "Cost Supports the market". What comment would I make on this particular situation?

Comment: "The CA (cost approach ) is an additional value indicator."

You can also expand the comment such as, "The CA is an additional value indicator, and lower than the sales comparison approach because buyers are paying more than the cost to build for existing homes, due to an inventory shortage " ( whatever applies)"

 

[Overimprovement]

I am a newly Licensed Appraiser and now that I am on my own am realizing my supervisor/mentor might have been a little off when instructing me on a few details. I have a new construction. Simple Q4 standard spec home. Everything including the site value which was derived from the market analysis is lining up perfectly. I have 4 great comparables that I am less than 5% Net and Gross across the grid on adjustments. I ran a Cost through Marshall & Swift Cost Estimator and it actually falls in line with the builders quote (plus Market derived site value).

With that said, my supervisor always told me to make sure my Cost Approach was more than the market so that you can say it was Fully supported. So in this instance I am at 222,000 cost with the market indicating 249,000. Back when I was a trainee his resolution would be to up the price per square foot the amount it takes to get to the market value. All the while training, I did this under his name because it was under his umbrella. Now that I am doing my own report I can see that is just does not seem right. I am in no position to question him now so I am coming to this forum for advice. I have found cold calling other appraisers in the area result in "I'm not involved and don't want to be" lol.
Basically, I just want to know if it is OK for the Cost to be less than the market as long as I do not use any of the percentage in the reconciliation since the Market is always the best indicator.

M&S is a starting point, but an in depth cost approach has many pieces. Are you completely up to date (at least Q1 '23)? Local multipliers in effect? Site improvements well supported? Pure site cost does not include utilities, concrete, etc. Entrepreneurial profit being properly reported? Slight quality and locational differences can also come into play.

Even with all this, there are nuances in the CA which can easily account for a 10% difference.

To your point, no they don't have to be equal, or CA higher to be able to say it 'supports' value. But they should generally be close. If not, further investigation is suggested.

 

[Zephyr999]

I am a newly Licensed Appraiser and now that I am on my own am realizing my supervisor/mentor might have been a little off when instructing me on a few details. I have a new construction. Simple Q4 standard spec home. Everything including the site value which was derived from the market analysis is lining up perfectly. I have 4 great comparables that I am less than 5% Net and Gross across the grid on adjustments. I ran a Cost through Marshall & Swift Cost Estimator and it actually falls in line with the builders quote (plus Market derived site value).

With that said, my supervisor always told me to make sure my Cost Approach was more than the market so that you can say it was Fully supported. So in this instance I am at 222,000 cost with the market indicating 249,000. Back when I was a trainee his resolution would be to up the price per square foot the amount it takes to get to the market value. All the while training, I did this under his name because it was under his umbrella. Now that I am doing my own report I can see that is just does not seem right. I am in no position to question him now so I am coming to this forum for advice. I have found cold calling other appraisers in the area result in "I'm not involved and don't want to be" lol.
Basically, I just want to know if it is OK for the Cost to be less than the market as long as I do not use any of the percentage in the reconciliation since the Market is always the best indicator.

It's good to be thinking about the two results and why they differ. Good for you.

Did the Cost Approach include Entrepreneurial Incentive...which is different from contractor profit?

 

[Terrel L. Shields]

With that said, my supervisor always told me to make sure my Cost Approach was more than the market so that you can say it was Fully supported.

Your super is an idiot.

I am at 222,000 cost with the market indicating 249,000

OK. Have you added in the EP (entrepreneurial profit)? Currently it my market that is more than 10% - closer to 15%.

If you have a good handle on the land value, the site improvements (utilities, landscaping, sidewalks, driveway - if not included in the bid), and have bid in hand, then the bid may lack an allowance for the developer's profit (or is a homeowner is contracting his own home, basically it is the savings he has by doing his own contracting.) So 222 + 22 = $244,000. That "supports" the SA within reason. Nothing requires the CA to be equal or higher than the SA. Challenge your mentor to show you where in a book that exists. It doesn't.

 

[George Hatch]

EP is volatile and varies widely according to market conditions. IRL the amount of profit or loss will literally be the residual

sales - costs = profit or loss. ​

When the SC results increase by 20% in one year it isn't because the land values and hard costs increased that much; it increased because the market conditions enabled the developer to pocket a much higher profit margin than would have occurred during a more moderate rate of increase. Or decrease. EP is heavily predicated on market conditions; not entirely, but significantly.

 

[Tiffany Gibbons]

M&S is a starting point, but an in depth cost approach has many pieces. Are you completely up to date (at least Q1 '23)? Local multipliers in effect? Site improvements well supported? Pure site cost does not include utilities, concrete, etc. Entrepreneurial profit being properly reported? Slight quality and locational differences can also come into play.

Even with all this, there are nuances in the CA which can easily account for a 10% difference.

To your point, no they don't have to be equal, or CA higher to be able to say it 'supports' value. But they should generally be close. If not, further investigation is suggested.

Make sure you have local multiplier, walkways, porches, patios, landscaping, etc. in there and all the interior stuff accounted for. In rural areas of custom built homes, M and S average to good quality might be in between if you read the characteristics. Make sure site value is correct. They should be close on new construction.