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Cost On New Construction

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Blue1

Elite Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
California
Working on a review assignment for new construction. The Cost breakdown (recieved from contractor) is approximately 55K below cost service estimate and abstracted market cost of existing comparable sales in the area. The appraiser 'cherry picked' comparbles to agree with the contractor's estimate but, in fact, there are more comparable sales signficantly higher than the contractor's cost estimate. I say the value should be higher than the contractor's estimate. What say you all?
 

Tim The Enchanter

Elite Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
Could be. You gotta do your own thing either way.
Are your prices rising at an insane rate like they seem to be here? <_<
 

Steve Wyrick

Member
Joined
Aug 15, 2003
Professional Status
Certified General Appraiser
State
California
If market sales are of good quality then regardless of cost they should prevail. With the current market it could be 6 to 8 mo. to build and with uncertian rates and construction cost the expense to build may in the long run be much more expensive than is currently projected.
 

Steve Owen

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Missouri
You are thinking along the right lines. I remember a similar incident where the cost estimate was higher than cost service. The sales and income approaches also came out even lower than my cost approach. The borrower asked the banker for a meeting. "What am I going to do? I have cost estimates higher than your appraisal." My response: You need to go get some more estimates - this is my opinion of what the property will be and the cost service also indicates lower cost to build. Unless you can show me where I missed something that is going to be part of the construction (always a possibility with hypotheticals) I am sticking to my guns.

Well, the borrower did get additional estimates, one came in near my figure. Later he thanked me for saving him a bunch of money. It never pays to back down. If there is no additional evidence to show where you missed it, stick to your original value opinion.

Your situation is certainly unusual, however. I have rarely seen contractors bid at below cost to build. I would certainly double check everything; with especially an eye on whether you properly understand the proposed construction. It is possible the contractor is bidding a lower quality building than you think.
 

JR Michaels

Freshman Member
Joined
Aug 5, 2003
Is there any builder profit shown in the cost bread-down? At the $300,000 range with 15% to 20% for builder profit and you have the $55,000. Some buildiers list it openly and some like to hide it in each of the items. Twice in the past 6 months I have gotten cost break downs that had no builder profit built-in at all. One was building a spec house on his own lot and didn't at it because he said he wasn't going to pay himself like that, he would just make his money when he sold the house. The other was building a house for his daughter and was doing it as cost, and he wanted the lower cost for the tax people so her property taxes would be a lot lower.

Also, what is the qualty of the materials being used compared to the other properties in the area. Do the comps used have the same quality/extent of materials as the subject, while the higher comparables may be significantly higher in quallity or there may be a lot more of them. Some people have to give up a lot in the quality and interior finish in order to get a big house in a good neighborhood.

The appraisers office may have done the appraisals on many of the new homes in the area and has first hand info about the differences quality and finish of the various houses. A more in-depth look may be in order.
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Appraisal 102.2 - Cost does not mean value!
 

Mountain Man

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
Georgia
What kind of financial shape is the builder in? Is he giving up some profit or risk buffer just to work, and keep the cash flow going? I know from experience, that if you can't keep your crew on a job, any job, they'll be gone next week. Also know that many builders do not have that much cash in the bank. They live off the draws, and gotta keep something going......... until the bubble pops.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
Cost estimate may or may not include profit, selling costs, survey costs, marketing, insurance, etc. Second, take a strong look at quality of finish that the builder is forecasting. If you just look at the materials list without an analysis of the quality of finish, you can take the same disclosed materials list and be $50 per foot different between two homes.

Also, just because a cost service is high doesn't mean that it's right. Invariably the M&S cost sheet is over what local builders are getting in this market. Always have been.

Roger
 

Patrick Egger

Sophomore Member
Joined
May 29, 2003
Professional Status
Certified General Appraiser
State
Nevada
Builder cost estimates and cost service estimates are generally different ... typically the builder's estimate leaves out some items or doesn't have them in at market levels. Cost services can be on the high side, depends on your market.

What we find in this market is that the land value is typically low or that offsite improvements and development fees aren't factored in to the finished lot costs. Aside from the builder's estimate, do you have a real good handle on the builder's projected quality, eg a copy of the description of materials? Also, builders often don't factor in loan costs and loan reserves/holding fees.

There can be any number of reasons, do a little more checking and I'm sure you'll pin it down.
 
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