Cost Approach vs Value Opinion

[hastalavista]

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.

JGrant:

Please tell me how you determine what the H&BU is as-improved if you don't know what the value of the site at its H&BU is as-vacant?

When completing the cost approach, please tell me how you conclude the site value without completing a H&BU as-vacant analysis for the subject's site?

I certainly don't want to "showboat" unnecessary analyses in my reports. Let me know how you do it so I can eliminate this basic analysis which might "confuse or mislead" readers.
(You are right; I wish there was a sarcastic emoticon because I could use it right now).

 

[Terrel L. Shields]

Please tell me how you determine what the H&BU is as-improved if you don't know what the value of the site at its H&BU is as-vacant?

Three cheers from the peanut gallery....

 

[Mike Garrett RAA]

While determining a site value can be important is it the most important factor in determining the highest and best use? I would suggest it is merely one factor in several in arriving at a HBU conclusion.

I do not do a land or site value analysis for 90%+ of my assignments. I can and do understand the reasoning for those who do but in my case my client does not require or even want a site value since they base their decision to guarantee the loan solely on market data (direct sales comparison) and not a cost approach.

Nearly all of my assignments involve typical residential properties in a subdivision of similar residential use. The highest and best use would be "as improved" in nearly all cases.

Additional considerations would be land use, master planning, and zoning. I used to tell my students..."I believe the highest and best use for my property would be "a casino brothel with a pawn shop". Now, what is wrong with that thinking? It always brought up interesting debate. Of course now in Colorado we need to consider use as a pot shop.

 

[Meandering]

I have just completed a New Construction report and have an issue that I am mulling over. The purchase contract price for the subject (including lot) is $300,000+/- . My final opinion of value is at $250,000. My Cost Approach value is $325,000 (Marshall & Swift). I am trying to determine what factors are at play for the discrepancy between my value and the Cost Approach value. I am very confident that my value is accurate. Any thoughts?

Sales Comp Approach.........$250k, 16% -/+ below sale price

Purchase Price...................$300k

Cost Approach.....................$325k 8% -/+ above sale price.

More than OB, you're going to need to explain how come your CA is above what the builder is willing to build it for.

Then you have to support why the buyer is willing to over pay what the market supports.

Just looks like you're missing something in one approach and went overboard in the other approach.

.

 

[J Grant]

JGrant:

Please tell me how you determine what the H&BU is as-improved if you don't know what the value of the site at its H&BU is as-vacant?

?? I provide a site value. I was talking about a lengthy narrative of HBU as vacant not being necessary for most res assignments (in my opinion). I did not state a site value or HBU should not be provided.

When completing the cost approach, please tell me how you conclude the site value without completing a H&BU as-vacant analysis for the subject's site?

I do HBU as vacant, it's in work file or brief narrative, unless relevant to assignment results I don't go into long narration on HBU as vacant.

I certainly don't want to "showboat" unnecessary analyses in my reports. Let me know how you do it so I can eliminate this basic analysis which might "confuse or mislead" readers.
(You are right; I wish there was a sarcastic emoticon because I could use it right now).

See above comments...I think there was a miscommunication or I did not explain well enough my point in the post.

 

[J Grant]

JGrant:

Please tell me how you determine what the H&BU is as-improved if you don't know what the value of the site at its H&BU is as-vacant?

I develop a site value and typically provide a site value. Where in my post did I advise anyone not to provide a site value or do HBU as vacant? I said, lengthy analysis of HBU as vacant is not relevant to Most res assignments, if an appraiser feels it is then provide it.

When completing the cost approach, please tell me how you conclude the site value without completing a H&BU as-vacant analysis for the subject's site?

I do HBU as vacant, but it stays in work file or brief narrative. Unless it is relevant to assignment results, I don't go into long narration about vacant HBU if it is same as improved HBU.

I certainly don't want to "showboat" unnecessary analyses in my reports. Let me know how you do it so I can eliminate this basic analysis which might "confuse or mislead" readers.
(You are right; I wish there was a sarcastic emoticon because I could use it right now).

see above comments. Either a mis communication or I did not explain my thoughts clearly enough on post.

 

[hastalavista]

I do HBU as vacant, but it stays in work file or brief narrative. Unless it is relevant to assignment results, I don't go into long narration about vacant HBU if it is same as improved HBU.

No one has said "long narration". I have said the a H&BU as-vacant is needed to determine a credible H&BU as-improved. If it is needed, it is part of the analysis. If it is part of the analysis, it needs to be summarized (IMO, per the USPAP). My H&BU as-vacant statement for a typical one-to-four residential mortgage assignment is 3-4 sentences; but it summarizes the analysis.
I suggest you read AO-11 and then you can do what you think is appropriate, but at least you will have taken the steps to gain the necessary knowledge to make an informed decision.

But, regardless if you agree/disagree on the level of summary for a typical assignment, for a fact, when doing the cost approach, if you are going to do it correctly, then you must analyze the subject's site and determine its H&BU as-vacant so that you correctly select the right market data to form your opinion of value of the site, vacant and ready for development.
If you are required to do that analysis for the CA (and trust me, you are), then you would be required to include that summary in the appraisal report.

Like it or not.

 

[J Grant]

Agree on last post. I do provide a brief summary statement of HBU in reports on addendum..it's very brief unless there is a different HBU, then it could be as long as needed.

 

[mark young]

Some of the posts on HBU/Cost Approach/land value/SCA have been pretty good, but any chance this thread can get back to Jim's original post? Jim hasn't given enough information on the comps he has selected and why they were selected, much information on the subject itself, as well as any of his thoughts or reasons as to why there would be such a difference in the sales comparison & cost approach since this is his appraisal. Since this is new construction, Jim hasn't said if his estimated value is subject to or as is.

Earlier I posted about differences in time from contract date to effective date of the appraisal and market differences as a possible reason, another thought is that sometimes builders don't always report sales on MLS because buyers go directly through the builder for the purchase and it was not listed on MLS. If they were not reported on MLS, they could also be too recent for a county records search of these sales. You need to contact the builder (as well as any competing builders in the area) to see if there have been any other recent, similar sales that would support value and may not have been listed on MLS.

I am assuming Jim has looked and considered any external obsolescence but maybe he hasn't. My only other thought is that the original sales contract included some higher end upgrades (possibly overimprovements) and during the construction there were changes made to the original contract and the features/upgrades were reduced and Jim didn't receive the amendments to the original sales contract. I have never seen that happen as typically the costs go up, but it could be possible.

 

[Tim Hicks (Texas)]

Did you apply quarterly and local multipliers?