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Cost Approach

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carlos alvarez

Sophomore Member
Joined
May 8, 2006
Professional Status
Certified Residential Appraiser
State
Florida
Hi can anybody tell me if we must provide the cost approach if it is for Insurance purpose, I told lender their is an additional fee for the cost approach but lender does not want to pay for it , As per 4150 D :Section 9 – Cost Approach
If the subject property is new construction (less than one year old), or the Cost Approach is recognized in the market as a basis for pricing, the appraiser may complete the Cost Approach; however, it is not required for an FHA appraisal. If, however, the subject is a unique property, has specialized improvements, is manufactured housing, or the client requests the Cost Approach be completed, then the Cost Approach is required and must be completed. The square foot method is to be used.
Your help is greatly appreaciated. :fiddle:

Carlos Alvarez
St Cert RD 6811
Miami Florida.
 

Brad Pack

Junior Member
Joined
Jan 15, 2002
Professional Status
General Public
State
California
Hi can anybody tell me if we must provide the cost approach if it is for Insurance purpose, I told lender their is an additional fee for the cost approach but lender does not want to pay for it , As per 4150 D :Section 9 – Cost Approach
If the subject property is new construction (less than one year old), or the Cost Approach is recognized in the market as a basis for pricing, the appraiser may complete the Cost Approach; however, it is not required for an FHA appraisal. If, however, the subject is a unique property, has specialized improvements, is manufactured housing, or the client requests the Cost Approach be completed, then the Cost Approach is required and must be completed. The square foot method is to be used.
Your help is greatly appreaciated. :fiddle:

Carlos Alvarez
St Cert RD 6811
Miami Florida.

...or the client requests the Cost Approach be completed, then the Cost Approach is required and must be completed.

What don't you understand?
 

Metamorphic

Senior Member
Joined
Mar 15, 2008
Professional Status
Certified Residential Appraiser
State
California
In a CE class I took recently they suggested you routinely include a disclaimer regarding the cost approach that it is specifically NOT suitable for and should not be used for insurance purposes. I dont recall exactly what about the standard residential appraisal cost approach makes it unsuitable for a insurance purposes.
 

carlos alvarez

Sophomore Member
Joined
May 8, 2006
Professional Status
Certified Residential Appraiser
State
Florida
I have in my addenda this:
Three approaches to value (income, sales comparison, cost) were considered. The income approach is inapplicable as there is no rental income and as a result no gross rent multiplier. Therefore the determination of probable market value is being made under the sales comparison approach which best reflects this type of market. The cost approach is not applicable and should not be used for insurance purposes.:new_multi:
 

David Dietz

Member
Joined
Oct 30, 2006
Professional Status
Certified Residential Appraiser
State
Florida
I use this comment:

Cost approach required by client but the appraiser does not consider it credible or necessary. At the request of the client, development of the cost approach has been attempted by the appraiser as an analysis to support their opinion of the property`s market value. Because there is insufficient market evidence to credibly support the site value/derivation of total appreciation, the cost approach is not given any consideration in the appraiser`s final analysis. Use of this data, in whole or in part, for other purposes is not intended by the appraiser. Nothing set forth in the appraisal should be relied upon for the purpose of determining the amount or type of insurance coverage to be placed on the subject property. The appraiser assumes no liability for and does not guarantee that any insurable value estimate inferred from this report will result in the subject property being fully insured for any loss that may be sustained. The appraiser recommends that an insurance professional be consulted. Further, the cost approach may not be a reliable indication of replacement or reproduction cost for any date other than the effective date of this appraisal due to changing costs of labor and materials and due to changing building codes and governmental regulations and requirements.
 

realbiz

Junior Member
Joined
Mar 14, 2008
Professional Status
Certified General Appraiser
State
California
...or the client requests the Cost Approach be completed, then the Cost Approach is required and must be completed.

What don't you understand?

Well said, just complete the cost approach and put in a disclaimer.
 

incognito

Senior Member
Joined
Jul 14, 2005
Professional Status
Certified General Appraiser
State
Florida
Three approaches to value (income, sales comparison, cost) were considered. The income approach is inapplicable as there is no rental income and as a result no gross rent multiplier.
Carlos, the GRM does not come from the subject. The fact that the subject is not a rental is irrelevant. GRM comes from the comparables. If every other house on the street is a rental, you better bet that the income approach is "applicable". You may want to re-word this.

If it is a client you wish to retain, do the cost approach. State in your report that it was a supplemental standard (or I should now say an additional item included in the scope). Give it as much or as little weight as you wish. Remember, just because FHA says you do not have to do it DOES NOT make it automatically not necessary to do! YOU decide what approaches to do, not the client, or FHA.

Also, as has been suggested, make sure it is understood that the CA is not intended to be an estimate of insurable cost, and that it is outside of the scope of the report, and the purview of your licensing and training to provide an estimate of insurable value.
 

RSW

Elite Member
Joined
Feb 18, 2002
Professional Status
Certified Residential Appraiser
State
Tennessee
In a CE class I took recently they suggested you routinely include a disclaimer regarding the cost approach that it is specifically NOT suitable for and should not be used for insurance purposes. I dont recall exactly what about the standard residential appraisal cost approach makes it unsuitable for a insurance purposes.

The Marshall & Swift Cost approach most appraisers use is based upon subdivision construction and does not take into account for the demolition of an existing structure and removal of the debris.
 

Mike Boyd

Elite Member
Joined
Jan 18, 2002
Professional Status
Retired Appraiser
State
California
...or the client requests the Cost Approach be completed, then the Cost Approach is required and must be completed.

What don't you understand?

He wants to know if he can charge extra for it. The answer is, IMNSHO, if the request for the cost approach was NOT mentioned in the appraisal order or the lender's SOW, then, YES, you can charge extra for it. But you might lose a client and it will likely be highly scrutinized by that client. If they are willing to pay extra for it, I would pay the $8 fee to Marshall/Swift and let them calculate it. You still have to provide a land value and the as is site improvements.
 

Mike Boyd

Elite Member
Joined
Jan 18, 2002
Professional Status
Retired Appraiser
State
California
The Marshall & Swift Cost approach most appraisers use is based upon subdivision construction and does not take into account for the demolition of an existing structure and removal of the debris.

M/S has a variety of quality grades and you can even upgrade from those, if needed. The problem is that it is only updated quarterly and my bet is that even those updates are outdated. AND, the typical appraiser does not know how to augment M/S for local cost factors such as localized and outrageous permit fees, sewer and water hook-up fees as well as the COST to run water and sewer lines, the cost for electric service and the difference between overhead and underground service costs. There are many costs and fees in some communities and if you call the building department, they may not include those that are not construction related.
 
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