Cost Equals Value, Or Not

[J Grant]

Under classic appraisal dogma, when "value" exceeds cost it is either because the income (blue sky, excess profits, etc.) is higher or the person is stupid (ie- the cost to build new on new lot is less than they would pay.) The alternative is that there is no comparable lot to develop and in that case, the value is reflecting the underlying scarcity of the land (value should be accrued to the land, not the buildings).

If so, there are a lot of "stupid" buyers out there....buyers will pay more for an upgraded house or condo than the upgrades cost, for two other strong reasons 1) move in condition, buyer does not have to take on dealing with contractors, mess, noise etc, 2) when a buyer purchases an already improved house, they can finance the upgrades or renovations, vs if they buy a house in dated condition and then have to pay cash out of pocket for upgrades.

 

[Terrel L. Shields]

there are a lot of "stupid" buyers out there

Yes, and a lot of stupid homeowners who spend far more to remodel than the net cost to sell out and simply build or buy what they want. A relatives widow has a ton in a house and after a mere 10 years is already remodeling again...it isn't so much a hobby as a fetish with her. And if she doesn't outlive her money she is going to come close.

 

[J Grant]

People have a right to be "stupid" with their own properties. If they own, they can remodel or over spend as much as they they want ...and if they buy they can over pay or make foolish decisions.....

It's only if any of these folks apply for financing and when we do an appraisal on the dream home /money pit they own or want to buy that it matters..

 

[Tim The Enchanter]

Sent it in and we'll see what they say, if anything.
I'm sure this client will read it, not sure about the borrower.
Return on investment / expense about 1/3, with 2/3 into the ether.

The opinion of market value is quite a bit higher than the last sale in 2016. The increase is attributed to the remodeling and upgrades completed by the current owner. It is less than the total of the last sale price plus reported cost of the remodeling, which illustrates that cost does not necessarily equal value.

 

[Elliott]

Even Einstein couldn't make the Cost = Value equation work. He eventually gave up and said, "Its impossible, can't be done." He also said that if cost were to equal value than home builders would have constructed houses on every vacant lot in America.

 

[residentialguy]

Even Einstein couldn't make the Cost = Value equation work. He eventually gave up and said, "Its impossible, can't be done." He also said that if cost were to equal value than home builders would have constructed houses on every vacant lot in America.

What are you smoking? Cost often = Value. You can't construct houses on every vacant lot in America, unless you had that many buyers. We're getting there, though.

 

[Mike Garrett RAA]

My personal residence is a classic example of what not to do. Upgrades put it about 15% above the market of the neighborhood. I kept telling my wife..."we won't get our money back if we have to sell!". She replied..."I don't care. I want tile floors, 6 panel doors, gold colored fixtures, upgraded carpeting, custom light fixtures, ceiling fans, nice landscaping, etc, etc, etc!". You can guess who won.

Now, 15 years later, we can get a premium for this house because of the upgrades. I lose again.

 

[Terrel L. Shields]

We're getting there, though.

Too true here. It gets more and more traffic from here to the courthouse. Luckily I don't have to go there often anymore. But "back in the day" when I started, we had to make that 25 mile one way trip about twice or three times a week. Today it takes 30 minutes longer because the last 10 miles instead of the last two miles is all new construction, building, and heavy traffic

 

[Mike Garrett RAA]

One of the advantages of having a local appraiser's group. We were able to get the assessor to provide us with data on line rather than having to make that trip to the court house. I can get the sketch emailed to me for no charge. In fact, the assessor has creating a job of doing just that.

 

[Terrel L. Shields]

I can get the sketch emailed to me for no charge. In fact, the assessor has creating a job of doing just that.

Ours downloads online into the field cärd and pix and sketches can be extracted here and most OK counties. In Washington Co., (Fayetteville) slightly different system, no photos but aerial view although the CAMA vendor there does post pictures in most counties they serve.