Cost Approach too Low!

[Terraform]

I have allocated, extracted, run Marshall & Swift again and again, and still my cost approach is low....In an area where no vacant land is present and homes are 30 years of age or older, my cost approach consistently comes in lower than my sales comparison by approx. the $ amount of incurable depreciation. However all of my peers seem to be finding a value by Cost approach that supports the Comparison estimate. Because I am using the allocation method by means of tax assessment figures and then also performing a land value estimate by means of extraction and coming up with consistent land values, I have to assume that my peers are overvaluing the Replacement cost Per heated SF. Is $95-$110 an accurate SF estimate for an Avg CB home with a slab, vinyl/carpet floors, composite shingle roof and no extra features? My figures come in around $72-$78 per SF. I have been including this in my final reconciliation: The cost approach was considered applicable, however the value estimate by Cost analysis is deemed less reliable when applied to older homes, therefore the most weight in the final reconciliation was placed on the value estimate by sales comparison. And it doesn’t seem to be fazing the underwriters………… Anyone else feeling my frustration?

 

[Doug Wegener]

$95-$110 is not accurate for an average quality home.

I wouldn't worry too much about a legitimate cost approach coming in low. If your using Marshall and Swift you'll see that they dont include everthing in their costs (see page 2).

Why are you even doing it?



"The Cost Approach is not required by Fannie Mae and has not been developed as per the pre-defined Fannie Mae scope of work for this report and as per the appraisers expanded scope of work for this report. The Cost Approach is applicable to this appraisal report but is not necessary to produce a credible market value opinion as an active real estate market exists of similar properties"

 

[Terrel L. Shields]

Anyway you slice it, the likely culprit is land value...land value as if a site...landscaping, utilities, etc. Improved land is hard to compare to unimproved lots largely due to the lack of unimproved lots...The allocation method leaves a lot to be desired and assumes the assessor is 'right'.

I would prefer an extraction method. That is, take the comps subtract the cost estimate of the improvements, apply to all comps a.k.a. purity of re-application. Apply some costing to comps, subtract and the site value is what it is....use that site value, then add in your "cost". If your houses are truly comparable then the costs should be comparable...if not, then your adjustments in the sales approach are wrong.

 

[Terraform]

Per the clients Guidelines & Report Instructions "All Interior inspections will need to be completed on the new form and must have the cost approach section filled out"

 

[Terraform]

"That is, take the comps subtract the cost estimate of the improvements, apply to all comps a.k.a. purity of re-application. Apply some costing to comps, subtract and the site value is what it is....use that site value, then add in your "cost". If your houses are truly comparable then the costs should be comparable..."

Your probably right.....Still, when I am reviewing appraisals in this area its typical to see land value estimates similar to mine but with Price per SF at 95-110. Perhaps most of the appraisers in this area are allocating as well, hah!

 

[Geoff Hatcher]

What is allocation by tax assessment figures? I never have learned this method of developing an opinion of site value. Is the cost approach reliable on 30 year old homes?

 

[Doug Wegener]

Used to be a fair number of appraiser would just do marshall and swift for the improvements, depreciate, 5% for site improvements, and then subtract the total from the concluded value of the sales comparison approach to arrive at a site value.

It works out perfect that way. I dont do it that way, prefering a legitimate cost approach which may be significantly lower than the sales comp approach. Marshall and Swift does not include entrepenuerial profit.

But I dont think I have ever had an underwriter call me up and ask me for the sales where I derived my land value, even when I said land sales data retained in appraisers files.

 

[Chris Colston]

Where are you located

Karl, those sound like the same types of houses I look at almost every day. If you are in the hurricane zones, M&S will be too low on the cost per SF. You need to add anywhere from 1.3 -1.5% due to material shortages and required new building codes. Also as noted by others, your land value could be short. Your depreciation could be too high, also. What are you using to determine that?

 

[Bill_FL]

How much do you include for Entrepreneurial Profit/Incentive?

 

[Michigander]

Are you sure you are applying all factors including climate and all local multipliers?