Entrepreneurial profit/incentive

[PNW RE]

Out of all the middling reports Ive reviewed or had the displeasure of glancing at Ive not once seen EP as a separate line item and adjusted for..There is a lag in the system somewhere where its not being taught or used by appraisers..Unfortunately most people back into the cost approach until its close to the sca.

When using a GSE form I include EP in the cost, augmented with narrative explaining the inclusion and definition. Narrative reports = separate line item

 

[ZZGAMAZZ]

So what up if results of the CA, which include a market analysis of vacant land, do not correspond with results of the SCA?

If it is assumed that both improved SFRs and vacant land experience similar buyers' speculation (or lack thereof), which of the two is accurate, and how might one 'splain the disconnect? Or does it even matter, but if not, why even both amusing oneself to care about the CA; and if so, should the results be scoped away and described as such in the SOW?

 

[Russ Kitzberger]

So what up if results of the CA, which include a market analysis of vacant land, do not correspond with results of the SCA?

That does happen, then the appraiser's knowledge is put to the test in how the indications of value are reconciled.

If it is assumed that both improved SFRs and vacant land experience similar buyers' speculation (or lack thereof), which of the two is accurate, and how might one 'splain the disconnect? Or does it even matter, but if not, why even both amusing oneself to care about the CA; and if so, should the results be scoped away and described as such in the SOW?

Assuming that you have accounted for depreciation, including a non-ideal improvement, then you have a simple difference in indication.

It happens many times in the income approach, as that is a calculated approach in many instances with many variables feeding into the computer/math model.

Sometimes it comes down to weighing based on the quality and quantity of data. Maybe you do not have as much support for the external depreciation or depreciation to the land due to a non-ideal improvement or the income data is very broad with national or regional data driving it. Or perhaps the subject market area has few sales and cost data is better.

Of course, there is the trouble of trying to explain all this to an underwriter......

 

[Russ Kitzberger]

why even both amusing oneself to care about the CA; and if so, should the results be scoped away and described as such in the SOW?

How would the lender be able to make sure the borrower has enough home/building insurance? The lender gets a few items through the CA: a free loose/high version of insurable value (cost approach includes items not in insurable value as most would define), a top-end indication of value indication, and a calculation to show that there is the remaining economic life equal to or above the loan term.

 

[ZZGAMAZZ]

How would the lender be able to make sure the borrower has enough home/building insurance? The lender gets a few items through the CA: a free loose/high version of insurable value (cost approach includes items not in insurable value as most would define), a top-end indication of value indication, and a calculation to show that there is the remaining economic life equal to or above the loan term.

I somewhat recall a statement/concept from years ago that "results of the cost approach do not apply to insurability; and I also vaguely recall discussing that factor with Marshall & Swift, which explained that insurable replacement cost was an entirely different protocol that was based upon a different M&S manual/protocol, although that was more than a decade ago.

 

[PNW RE]

I somewhat recall a statement/concept from years ago that "results of the cost approach do not apply to insurability; and I also vaguely recall discussing that factor with Marshall & Swift, which explained that insurable replacement cost was an entirely different protocol that was based upon a different M&S manual/protocol, although that was more than a decade ago.

The costs approach is a valuation approach/indicator, not for determining insurance, which I make very clear:

The cost approach has only been developed by the appraiser as an additional analysis in arriving at the opinion of market value for the subject property. Use of this data, in whole or part, for any other purposes is not intended by the appraiser. Nothing set forth in the appraisal report 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 appraisal report will result in the subject property being fully insured for any loss that may be sustained. Further, the Cost Approach may not be a reliable indication of replacement or reproduction costs for any date other than the effective date of this appraisal due to changing costs of labor and materials, as well as changes to building codes and governmental regulations and requirements.

 

[PNW RE]

How would the lender be able to make sure the borrower has enough home/building insurance? The lender gets a few items through the CA: a free loose/high version of insurable value (cost approach includes items not in insurable value as most would define), a top-end indication of value indication, and a calculation to show that there is the remaining economic life equal to or above the loan term.

Not included in the scope of work for development of the cost approach on a GSE form/intended use for mortgage related lending...

Edit: I know "they" will/do use the cost approach for insurance

 

[ZZGAMAZZ]

The costs approach is a valuation approach/indicator, not for determining insurance, which I make very clear:

The cost approach has only been developed by the appraiser as an additional analysis in arriving at the opinion of market value for the subject property. Use of this data, in whole or part, for any other purposes is not intended by the appraiser. Nothing set forth in the appraisal report 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 appraisal report will result in the subject property being fully insured for any loss that may be sustained. Further, the Cost Approach may not be a reliable indication of replacement or reproduction costs for any date other than the effective date of this appraisal due to changing costs of labor and materials, as well as changes to building codes and governmental regulations and requirements.

Sweet verbiage.

 

[BRCJR]

Lenders should only require an insurable amount that covers the loan balance. For a lender to tell a consumer how much insurance they need creates a liability. Lenders have the deep pockets, rest assured they would be named in a lawsuit.

I know a lender that used to do such until someone indicated to them they were creating a potential liability unnecessarily. They decided the insurable value is best left up to the insurance company to determine.

 

[ITVSME]

The lender isn't really trying to make sure the borrower has adequate insurance.
The lender wants to check a box that the collateral property is insured to minimum acceptable Fannie Mae standard so they can sell the loan into the secondary market.
It's FM that's allowing the lenders to misuse the CA as basis to check the box.

The CA typically comes in less than insurable replacement cost (new construction typically less than reconstruction basis).
The insurance is initially placed at the CA value: even though a properly trained and ethical agent should know better.
Time goes on, reported value remains static while inflation widens the gap, creating increasing underinsurance exposure.
Borrower makes improvements without reporting increased values to agent, further increasing the underinsurance exposure.

It was a bad situation when inflation was low.
Now with construction costs increasing rapidly, the aggregate underinsurance exposure is getting uglier by the day.