JeffMann
Freshman Member
- Joined
- Jan 17, 2002
- Professional Status
- Certified Residential Appraiser
- State
- Florida
“Are there any FNMA or USPAP guidelines/regulations that would limit the use of a limited report (i.e. no cost approach used) on a "new construction" (i.e. less than one year old)?”
I find this a most interesting question. Up front let me qualify my comments. I am doing this from the top of my head and am not citing any specific reference (nor do I have one).
An appraisal report is suppose to reflect the actions of the buyers and sellers in the market. For single family residential homes this generally excludes the Income Approach. Why you ask? In general, these are amenity properties and the buyer does not make his/her purchasing decision on the amount of income the property would generate. That is not to say that there are some buyers that purchase homes for income potential but in general this is not the case.
As for the cost approach. In general the same theory holds but we do have the case of new homes. Some new homes could be classified as new tract homes in subdivisions and semi-custom homes in subdivisions. In these cases I am referring to land owned by the developer where you purchase the product (land and building) from the developer. You also have the case where the home is either in a subdivision of custom homes or spot building by owners or speculators. In the case of tract or semi-custom homes you generally have to make your selection from the available models. In my opinion, where the developer is in control of the development and your selection is from the developer you are in a similar situation as purchasing an older used home. That is to say you have little or no control over the construction or cost. In these cases the purchaser does not make his/her buying decision on the cost approach as they have no say as to who is to build the home. In general its take it or leave it.
We here in South Florida have many such subdivisions where the buyer has no say in the cost of the home. The exception being some modifications and upgrades that can be added. The purchase decision on these homes appears to be similar to that of buying a used home; Where do you want to be; How much do you have to spend; What kind of condition or amenity are you looking for. I submit that these buyers do not consider the const approach in the purchase of these tract or semi-custom homes when buying from a developer/builder of a subdivision.
Therefore with the exception of owner/builder or fully custom homes the buyer does not appear to consider the cost approach. The only reason for a cost approach in most appraisals is so the lender can determine how much insurance to require on the dwelling.
In most cases here in South Florida the cost approach would appear to be superfluous. Therefore, the use of a 2055 would not violate the USPAP as long a you noted that you considered the cost approach and judged it to be not applicable.
In any event, if the lender wants the cost approach, I give it to them.
With the exception of the lender wanting to see a Cost Approach I do not see why a cost approach would be needed when buying an “off the shelf” home.
As to “I could care less if it is 110 years old. It still can be done and it is not hard- if you understand that depreciation (including effective age) is actually determined by the market and not by the inane assumptions you read in appraisal texts that say it is "subjective".” I generally do a cost approach or rather a reverse cost approach. This is to determine what the market is paying per square foot of living area. The difference between the cost to build new and what the market is paying per square foot of living area IS the market determined/recognized depreciation. Also, the reverse cost approach (using the 3 or 4 sales that are judged most comparable) gives me a basis for my living area adjustment.
Bradellis has it correct except I do it for the 3 or 4 most comparable sales to get a range of depreciated value per square foot. You just have to remember to take out not only the land value but the contributory value of other major amenities (pool, garage, etc). Once you have done this you then have a range of living area values, as recognized by the market, and you can reconcile a value to be used in the report in the market analysis and the depreciation to use in the cost approach.
QED
Jeffrey
(sorry folks, I have a tendency to ramble)
I find this a most interesting question. Up front let me qualify my comments. I am doing this from the top of my head and am not citing any specific reference (nor do I have one).
An appraisal report is suppose to reflect the actions of the buyers and sellers in the market. For single family residential homes this generally excludes the Income Approach. Why you ask? In general, these are amenity properties and the buyer does not make his/her purchasing decision on the amount of income the property would generate. That is not to say that there are some buyers that purchase homes for income potential but in general this is not the case.
As for the cost approach. In general the same theory holds but we do have the case of new homes. Some new homes could be classified as new tract homes in subdivisions and semi-custom homes in subdivisions. In these cases I am referring to land owned by the developer where you purchase the product (land and building) from the developer. You also have the case where the home is either in a subdivision of custom homes or spot building by owners or speculators. In the case of tract or semi-custom homes you generally have to make your selection from the available models. In my opinion, where the developer is in control of the development and your selection is from the developer you are in a similar situation as purchasing an older used home. That is to say you have little or no control over the construction or cost. In these cases the purchaser does not make his/her buying decision on the cost approach as they have no say as to who is to build the home. In general its take it or leave it.
We here in South Florida have many such subdivisions where the buyer has no say in the cost of the home. The exception being some modifications and upgrades that can be added. The purchase decision on these homes appears to be similar to that of buying a used home; Where do you want to be; How much do you have to spend; What kind of condition or amenity are you looking for. I submit that these buyers do not consider the const approach in the purchase of these tract or semi-custom homes when buying from a developer/builder of a subdivision.
Therefore with the exception of owner/builder or fully custom homes the buyer does not appear to consider the cost approach. The only reason for a cost approach in most appraisals is so the lender can determine how much insurance to require on the dwelling.
In most cases here in South Florida the cost approach would appear to be superfluous. Therefore, the use of a 2055 would not violate the USPAP as long a you noted that you considered the cost approach and judged it to be not applicable.
In any event, if the lender wants the cost approach, I give it to them.
With the exception of the lender wanting to see a Cost Approach I do not see why a cost approach would be needed when buying an “off the shelf” home.
As to “I could care less if it is 110 years old. It still can be done and it is not hard- if you understand that depreciation (including effective age) is actually determined by the market and not by the inane assumptions you read in appraisal texts that say it is "subjective".” I generally do a cost approach or rather a reverse cost approach. This is to determine what the market is paying per square foot of living area. The difference between the cost to build new and what the market is paying per square foot of living area IS the market determined/recognized depreciation. Also, the reverse cost approach (using the 3 or 4 sales that are judged most comparable) gives me a basis for my living area adjustment.
Bradellis has it correct except I do it for the 3 or 4 most comparable sales to get a range of depreciated value per square foot. You just have to remember to take out not only the land value but the contributory value of other major amenities (pool, garage, etc). Once you have done this you then have a range of living area values, as recognized by the market, and you can reconcile a value to be used in the report in the market analysis and the depreciation to use in the cost approach.
QED
Jeffrey
(sorry folks, I have a tendency to ramble)