Entrepreneurial profit/incentive

[PNW RE]

I have posted a similar question before, however will rephrase, as I am hoping to get some feedback.
Proposed MFG appraisal - Have all costs, dwelling cost, set-up, delivery, all site improvements and solid support for the land value.
SCA (good comps) = $400k+/-
CA (all costs) = $300K+/-
$100k difference appears to be entrepreneurial profit/incentive. Would you include this (+25%+/-) on a separate line item in the CA on the 1004C?

 

[Terrel L. Shields]

CA (all costs) = $300K+/-

Why is a Manf. Housing property selling for $400K when it cost no more than $300K? Who is the "entrepreneur"? The mobile home seller isn't. The movers aren't. The land owner isn't....so who gets the goodie? Short answer for a MH- no one. You are simply dealing with a speculative value of the comps. I can't answer further without looking at the issues but I am seeing 20% added for a stick built house- but I've yet to add 33% and certainly not for a MH.

 

[PNW RE]

Why is a Manf. Housing property selling for $400K when it cost no more than $300K? Who is the "entrepreneur"? The mobile home seller isn't. The movers aren't. The land owner isn't....so who gets the goodie? Short answer for a MH- no one. You are simply dealing with a speculative value of the comps. I can't answer further without looking at the issues but I am seeing 20% added for a stick built house- but I've yet to add 33% and certainly not for a MH.

The appraisal is for proposed placement of a manufactured home (2021 model) on a 5 acre parcel owned by the borrowers. The price the buyer is paying from the dealer + site development costs + land value (total cost approach) = $300k. SCA = $400 (good comps). Trying to reconcile the difference...

 

[Terrel L. Shields]

. Trying to reconcile the difference...

In a speculative market, I don't think you can reconcile it. Not that much in particular. But I would go back and look at your 5 acre bare land sales and see if you find higher comps. Here the range of comps for land in 5 acre parcels are so broad, I can find sales of $5000 an acre to $25,000 an acre in rural areas in the same school district. Makes little sense. But they are scarce enough, that the buyers take whatever is available. I'd hunt the comps on the public records too. MLS sales of small parcels in my neck of the woods only sell about 1 in 3 such tracts. The rest are private barter. The agents don't want to fool with 'cheap' property, only big bucks sales.

 

[PNW RE]

In a speculative market, I don't think you can reconcile it. Not that much in particular. But I would go back and look at your 5 acre bare land sales and see if you find higher comps. Here the range of comps for land in 5 acre parcels are so broad, I can find sales of $5000 an acre to $25,000 an acre in rural areas in the same school district. Makes little sense. But they are scarce enough, that the buyers take whatever is available. I'd hunt the comps on the public records too. MLS sales of small parcels in my neck of the woods only sell about 1 in 3 such tracts. The rest are private barter. The agents don't want to fool with 'cheap' property, only big bucks sales.

Thank you for the reply. I have viewed nearly every land sale in the market area, including active listings and 100% confident on the land value. I am not trying to "match" the two approaches, however having trouble with the large variance. CA is spot on, SCA is well supported. I have analyzed all MFG data on the MLS. There is a recently closed sale at $360k. Inferior site size, HVTL easement through the middle of the parcel, built in 2004 with inferior GLA. That set's the lower end of MV...but the cost for the subject is $300k.

 

[Sadie]

In a standard cost approach, the entrepreneurial profit is included in the cost per square foot. Not sure about a manufactured home. I would do a separate line, or just not include it and state that this is the cost to place the home on this particular lot. Difference is profit. My cost approach and MV approach on MH are typically far apart.

 

[PNW RE]

In a standard cost approach, the entrepreneurial profit is included in the cost per square foot. Not sure about a manufactured home. I would do a separate line, or just not include it and state that this is the cost to place the home on this particular lot. Difference is profit. My cost approach and MV approach on MH are typically far apart.

Thank you for your response. I finished the report, completed the CA based on the actual costs and provided extensive narrative regarding the variance, including the impact from the market conditions. I've never had a variance this large...just explained a lot in the addendum!

 

[Dublin ohio]

Why is a Manf. Housing property selling for $400K when it cost no more than $300K? Who is the "entrepreneur"? The mobile home seller isn't. The movers aren't. The land owner isn't....so who gets the goodie? Short answer for a MH- no one. You are simply dealing with a speculative value of the comps. I can't answer further without looking at the issues but I am seeing 20% added for a stick built house- but I've yet to add 33% and certainly not for a MH.

So if the situation was that it was a builder that "built" for $300k and then sold it for $400K. EI would apply?

 

[Terrel L. Shields]

So if the situation was that it was a builder that "built" for $300k and then sold it for $400K. EI would apply?

If you have builders building like improvements and pocketing the extra, then yes, I guess it is... or it is a speculative and imprudent buyer with more money than brains. "They don't make any more land." - Oldest Realtor cliché known to mankind. Scares people silly. "Prices always go up." was the other until 2008, although I fear most people think that 2008 was a one-off never going to happen again incident. RE financing and pricing is the opposite of an anti-fragile issue.

 

[Russ Kitzberger]

$100k difference appears to be entrepreneurial profit/incentive. Would you include this (+25%+/-) on a separate line item in the CA on the 1004C?

EP/EI should always be addressed as a separate line item in any cost approach.

Many appraisers skip over the EP/EI in the past decade because it was not present in many markets. When this occurs, it should be noted that EP/EI is not supported in the marketplace and offset by external conditions.

The presence of it indicates healthy market conditions and demand forecasted ahead of the supply. When it reaches equilibrium, then you will see speculative development sitting longer (Spec Homes in your case sitting vacant for longer and longer before purchase).

It doesn't have to be builders, although they are many times the first ones to do spec when financing is available. Spec can also be third-party investors, which is the case with many of the large developers/builders selling their models to investors and leasing back. The investors have a pre-determined return they are seeking.

Many Appraisers and lenders have bad bad experiences and memories of speculative building, so they are biased against it, although today if you spec'd homes, you would make a glorious profit in many markets.