Cost Approach

[pgerarde]

I know this will seem like an entry level appraisal question but...

I have appraised for many years where there were no vacant land sales. To get to land value in the cost approach we basically backed into it. i.e. the difference between the selling prices and the cost to build was the "land value".

I am now in a rural area. I am also using the Marshall Swift estimator and now have vacant land sales for the cost approach.

My question: when I use my vacant land sales in the cost approach with the estimate of cost to build, my cost approach is no longer in line with the current selling prices for that development. I have a difference of about $25,000. (Cost to build is lower than the selling prices) My first thought would be that that this is the profit that the builder would make. but I normally have seen the cost approach and sales analysis approach mirror each other.... (by the way, these are new homes...no depreciation difference at this time)

Should these support each other...dollarwise?
If I leave these two approaches so far apart will this cause an underwriter to drive me crazy??? Redflag???

Thanks for your help.

Patti in Chino Valley

 

[Jo Ann Meyer Stratton]

Patti:
Are you adding the costs of putting in a road to the site, leveling an area for a building pad, bringing utilities to the lot line and onward to the improvement, installation of septic tank, drilling for a well, putting in a driveway, etc, etc. Vacant land sales (especially if they are metes and bounds splits are raw desert without any amenities or site access or site preparation and will require everything). Also contractors in small towns don't care what M&S says should be the cost to build a structure. There can be 25% differences between two contractors building on ajacent lots building the same floor plan out of the same materials from the same supplier, using the same subs. But don't you know Builder A "only builds quality houses" and Builder B "just throws things together". One might be using licensed contractors, one might be using unlicensed subs, one might be using the licensed contractors employees on weekends and days the licensed contractor doesn't have any work. So welcome to a small town!!

 

[Restrain]

First: Be careful of M&S costs. I have found that when using M&S I often have to use my own local cost adjustment, especially in rural areas. M&S is a guide, not a Bible. Second, custom builders and small builders often have a 10-15% builder profit on top of overhead, etc. Check with a builder and see what their $/SF cost is running. That'll get you real close. Even with land costs, you're having to deal with extraction to see what the land value is to the builder. Remember, a builder may be getting a bulk rate on land.

 

[Wally Jones]

Patti,

Good advice from above. (Wow! That sounds like divine guidance!) The part about talking to local builders may help you, but be prepared for some snubbing. They're busy and you're wanting free information, so it may not be easy to gather. (But by all means try!) Another tip: try to keep a file on any plans and specs jobs you do as well as any remodeling estimates. Over time, this can be invaluable for creating your own local building cost data base and should be the most accurate for your specific market.

Good luck! 8)

 

[Mike Garrett RAA]

I do a goodly number of "new construction" or "proposed" appraisals for the VA. In doing so, I receive a lot of cost information from the builders. We also have good land sale data to further support our cost approach.

Marshall and Swift does a really good job of breaking out costs. There are so many possible combinations however, it is difficult for most appraisers to pick the right ones. Be sure you are adjusting for location, updating the book for time, and applying local cost factors to your numbers.

Create a file of builder cost factors for upgrades...it is not uncommon in my market for these upgrades to equal 15 to 20% of the cost of a new home. If your area has a home builders association, consider joining. Lots of very good information AND a great place to market your services.

 

[John Hassler]

Patti

Whats seems to be missing on the URAR is a spot for soft costs which vary by the lot value and governmental costs of building.

For example: You build two identical homes but one is on a $200,000 lot and the other is on a $400,000 lot (larger, better view, whatever), a difference which is supported by actual land sales. Your land carrying costs (or opportunity costs) are double for the more expensive lot even though the cost of the sticks and bricks is the same. Where do you put this difference in the URAR cost approach? Land carrying costs are a significant factor in my area where land value is typically 40-60% of the overall value.

M&S is a good start but you must also add in the cost of permits and fees which can vary greatly between cities. I looked at a proposed 4,000sf home where the permits and fees (building permit, water meter, traffic mitigation, school impact, etc) were $42,000. That's over $10/sq ft before you even scratched the dirt.

Add some land carrying costs and check into the actual permit costs in your area. I think that's were you'll find your missing $25,000.


John Hassler

 

[pgerarde]

My thanks to everyone for your input and insight. I suspected as much but wanted to make sure I was not out in left field. Also got some great ideas from you all.... Great to have you guys...

Patti in Chino Valley

 

[Terrel L. Shields]

I work almost exclusively in rural areas. I use Boeckh software and run the survey. I find this to be far closer to the plans and specs costs I have around here. Some builders quality levels can be predicted. In other words, a builder will often build a 50% A / 50% B house regardless of size, location, etc. Custom homes are little more difficult because of custom features like all hardwood floors. The cost difference between a Woodaire functional fireplace ducted directly into the CHA ducts vs a gas log is about $4000. Nevertheless good accurate costs can be had and vacant land values need to be aware of site costs. I am also of the opinion that the typical builder is adding a risk factor. Constractor mark ups over owner contractor is often 10-15%. Thus a 100,000 home, on 25,000 site may be $140,000 if sold by a contractor. But the person buying the lot direct, then building as his own contractor will be cheaper, and usually sell cheaper simply because sellers are reluctant to take less than what they have in a property.

 

[msking]

I'm glad this thread was started - it reminded me of a question I have wanted to pose for awhile.

In my urban/suburban area, house "values" are escalating rapidly, both for new houses and resales. It is difficult for me to understand the relationship of cost-to-build to market value.

Using M&S, cost to build is ALWAYS considerably less than market value using comparable sales (and I'm talking 6-12 comparables - we are in a market with PLENTY of RECENT comps). Doesn't matter whether I am dealing with a brand new house, 2 year old resale, or 20 year old resale.

Recently, dealing with a house still under construction, I asked the builder"s agent for the current base price for the identical model. It was $20,000 higher than the base of the subject, which had just sold 2 months earlier and is still being built.

Where do you factor in the $20,000? I can't believe that building materials/labor costs have jumped that much. Is this part of "entrepreneural incentive" - the builder adds on whatever the market will bear? Buyers are paying it, believe me.

In a rapidly rising market, with more buyers than inventory, what is the relationship of cost-to-build vs market value by sales comparison?

 

[Farm Gal]

MS

You can call it stupid/desperate buyer syndrome and not be too far off the mark. Willing buyers, though... hmmm how to handle this.

Personally I discuss my findings and as is currently advised 'discuss it in the scope' supporting my adjustment or lack thereof: let the lender sort it out. They were warned :twisted: IF in my opinion the market is willing to pay for 'builders premium' during the good times, it is just normal supply and demand: Economics in action. I indicate what I perceive as 'current cost' and 'current market' even if it seems a tad silly to me.

I don't try real hard, as our market isn't nearly as 'hot' as that in other areas. I DID recently get into a regular brou-ha-ha on a custom build in a high end area wherein the primary builder of such homes had several for sale for significantly less, on the same block as my subject (which of course had every upgrade known to mankind) AND to top it off an owner finished lower level. Let us kindly limit quality description to it wasn't their day jobs and they shouldn't quit thier other employment 8O . Point is that most buyers could not have cared less and some would have objected mightily to the proud owners selection of finish materials and quality of basement finish. As D3P I just report the facts and my opinion. You should have heard the screams.

In some areas I reluctantly conclude that at a given point in time, the market indicates a premium for 'completed houses for sale'. HOWEVER if there IS a downturn, slowdown or other event which causes any change the historical method of surveying value is entirely useless!

I guess it boils down to know thy market, Cover Your Assets, and pay attention if you even get a whiff of slowdown.