Cost Approach vs Value Opinion

[CANative]

From the 2013 selling guide:

 

[J Grant]

The above post by CanNative is what I stated. They are not asking about builder profit, or builder loss relative to what he spent. They are asking if present use Is the HBU, present use being the existing (or proposed ) house on the site. The house contributes more to site than if vacant. ( and meets the other points of HBU legal etc)

 

[J Grant]

The mere fact that the h&b use as vacant is with SFR improvements does not mean that a particular dwelling is the optimum use of the site.

One can say that about nearly every house that exists on a site. A new house would contribute more value than an older one, a bigger one rather than a smaller one. Do we recommend tearing down every house because it is not optimum?

I understand your point but in practice it would be absurd.

 

[J Grant]

Well if you start out with a site and decide to build a home that will cost more than it is worth in the end then the optimum use for the site would be to leave it vacant. This is why Highest and Best Use is analyzed as vacant and as improved.

I understand your point, as it relates to "maximally productive", however, the assignment is supposed to be meaningful for intended use/intended user. If the assignment was for a builder and he was engaging should he build or not build X model house on vacant site, then answer might be "no." But the assignment is for a purchase of house and site together, and the HBU as a package. As vacant land HBU per legally permissible, financially feasible etc is residential.

Whether or not a builder can make money on sale is imo beyond SOW....appraiser would have to be expert on what it cost a builder to build and value of site as a subdivided part of original tract of land, as opposed to M and S costs which apply to a spec home one house being built and a site value estimate based on sales of lots.

Per post, the OP value opinion is 250k but SC price is 300k, so if builder is getting 300k from other buyers, builder may not be losing money. Also, the OP is using Marshall and Swift and a retail estimate to acquire the site came to 325k, but it may have cost the builder in reality 200k acrued expenses to develop the house on the site. The site was part of a large tract land acquisition, builder uses crews and bulk supplies.

As always, a cost vs value vs SCA gets lively discussion and offers opportunities to learn and share knowledge/points of view.

 

[Lee Lansford]

Less than optimum improvements, as improved, also does not necessarily mean they dont represent the current highest and best use of the site.

To clarify, yes, no doubt, "less than optimum" is a market based observation, not theoretical.

 

[Lee Lansford]

One can say that about nearly every house that exists on a site. A new house would contribute more value than an older one, a bigger one rather than a smaller one. Do we recommend tearing down every house because it is not optimum?

I understand your point but in practice it would be absurd.

Why would one "recommend tearing down every house because it is not optimum"?

If you understand my point, you understand how it applies in practice.

 

[J Grant]

Agree on the practice part ! (sometimes I post exaggerated sarcasm and people take it literally, wish there was a symbol for that ):mellow:

 

[Lee Lansford]

It's nice, every once in a while, for appraisers--when communicating (in part) an appraisal via a Fannie form--to go above and beyond the "check-box" mode of communication to provide SOME (as in "I seldom see any") analysis.

As to "above and beyond", the form has for many years now (and, yes, even now in light of the two reporting options) included the word "summary"; thus, what I suggest is nothing extraordinary (other than my observation that most appraisers don't go beyond the X'ing of the "yes" box).

 

[J Grant]

It's nice, every once in a while, for appraisers--when communicating (in part) an appraisal via a Fannie form--to go above and beyond the "check-box" mode of communication to provide SOME (as in "I seldom see any") analysis.

As to "above and beyond", the form has for many years now (and, yes, even now in light of the two reporting options) included the word "summary"; thus, what I suggest is nothing extraordinary (other than my observation that most appraisers don't go beyond the X'ing of the "yes" box).

I agree, but do it for a constructive purpose that lead to more credible results, as opposed to showboating about vacant land HBU when it might not be applicable to assignment and can confuse or mislead users.

Imo, the best of the best is often in the work file and of course in the years of knowledge and experience, which guides us what to leave out of a report as well as what to put in.

 

[J Grant]

It's nice, every once in a while, for appraisers--when communicating (in part) an appraisal via a Fannie form--to go above and beyond the "check-box" mode of communication to provide SOME (as in "I seldom see any") analysis.

As to "above and beyond", the form has for many years now (and, yes, even now in light of the two reporting options) included the word "summary"; thus, what I suggest is nothing extraordinary (other than my observation that most appraisers don't go beyond the X'ing of the "yes" box).

Rant time.. (not at you, at the status quo). I agree, analysis sorely needed, and some appraisers do provide it. And then again some don't. The low fees and fast turn times prevalent are a disincentive to analysis

Imo, a new construction appraisal is a complex assignment but not treated as one by too many. Their solution is get 3 new home sales from builder that support subject SC price, stick them in, put in a token resale that supports price, then wrap up with brilliant conclusion (sarcasm) that buyers are willing to pay $X in "Castle View Estates" (grandiose name), therefore, subject is worth $ X.

Well, subject may or may not be worth $ X. What is needed in new construction appraisals is analysis of the builder premiums to buyers such as lot premiums and line item upgrades...are the buyers making informed choices ? How do the premiums hold up in the resale market? How does # of homes and phases in builder community impact value? Is the community too large, which might create over supply in area? How are resale's in community selling? How are the listings of resale's doing? How does subject community compete against other new communities and established recently built communities? What about community location? In a number of regions, the best land closer to water or cities is built out, leaving avail vacant tracts for building in outlying locations.

HBU as vacant, if site if area/site is commercial or mixed zoning or transitional it could be critical, but most builders have done their homework and the HBU and zoning is some form of residential.

Whether or not builder makes money is less important regarding site as vacant then it is about whether builder might run out of $ due to low sales and abandon community, leaving it half finished, which could impact subject value. (example of which analysis is more useful for intended use)