Is The Cost Approach A Real Thing?

[RCA]

I appraise in SD county and I can appraise land parcels anywhere in town. Including the older areas that are fully built out. Same throughout the other counties in this region. It just takes more time, effort and research than pumping out a 1004 on a tract home, and it usually requires the use of a wider geographic area and more adjustments to compensate for location and other attributes. Bear in mind that the buyers/sellers of land parcels are not the same as for properties with an existing use.

The main reason to not use a CA is if none of the market participants are using it. Which is almost always the case for existing uses. Just because it's possible doesn't automatically make it necessary to get to MV. I daresay the inclusion of a CA in most SFR assignments calling for it will be driven by the user's request, not the appraiser's need of it to get to MV.

"Cost approach was not necessary to develop an opinion of MV but is included solely at the Client's request."

If/when that's the case.

Another reason is the inaccuracy of Cost Tables or Services, in combination with the very rough approximations of architectural, construction and fixture details in the subject and comparable properties. CA is never better than a rough approximation, - unless you are going to run it off actual construction construction costs for the subject as of the effective date of appraisal - or some relatively close date, such as date of purchase (which to be accurate should be updated to cost as of effective date, only there are limits to what you can profitably accomplish). Two independent appraisers doing the CA on the same subject property for the same effective date, could not be expected to be close in value, unless they were using the same cost data.

 

[Ariba]

I can't prove it, but I certain that most have never talked to a local builder about building costs... but, of course, their report says they did.

I'm sure you received their "Black Book" on construction costs. Next, if you believe in Marshal & Swift" Why do you need to talk to a builder" Marchal & Swift has all the answers.

 

[Ariba]

Where are you? Long Island? LA County? One guy complained no land sales in San Diego County...I found 600 on Zillow???

Now that is a great source for disinformation on land sales, Zillow. How many land sales did they have for the urban city of San Diego?

 

[JamesDPratt]

I use the Online Craftsman system, like looking reports and looks great in my report.
Very few Lenders call for a Cost Section anyway

If I do New Construction I require the Builders Cost Data and I include that in the report.
So the numbers always look in line with that data

I have two Land Systems, one for rural where I get a great looking chart I built on Excel
and one for City/Tract type Homes with a data list for the report, also in Excel
Both very simple and I can send it to anyone for use
jdvalues@gmail.com
I don't see the City/Tract Home one as Market Driven, but have never been asked as I m
one of the few that even puts in such data in a report

I have had lots of time for Excel as I am only doing about 4 reports a month now, down from
15 to 20 under Trump

James

 

[J Grant]

There were plenty of small lot sales to develop a CA. look for yourself - zillow - mark sold, deselect all categories and selct lots/land

I am not going to spend time looking up lots in SD !!!

If a local appraiser says there are no lot sales, they mean in the relevant residential area. IIdk where you found those small lots but one area in that county can vary wildly wrt value and location.

 

[NC Appraising]

Is the Cost Approach for real?

Yes. Should it meet or be near the sales approach? Yes and no.

Couple of examples:

1. New tract PUD development of Q4 quality homes. You have two assignments and both are the same floor plan.
one has no upgrades at all. $300,000
the other home has $40k in builder upgrades. $340,000

The one with no upgrades should be near the contract price per your cost provider (under a stable market/no supply issues, etc)
The one with the upgrades, what do you do?
1. Keep it the same. Use what the cost provider said.
2. Some will increase the quality rating (avg to good) or average the quality rating (avg/good)
3. Use what the base costs are per the cost provider and then add the builder upgrades (per the contract) into the report.

So when appraisers say M&S & local builders, etc. I do not have a problem with that. If you have a 200 tract development and buyers are paying the prices for the upgrades, thats market data. I get the upgrade list from the builder with the cost of the upgrades. For custom built homes, I save the costs from builders estimates. Local data.

As for land values, in my market site to value ratio is typically 17-24% for tract developments.

So depending on how you develop the cost approach, it is "real", but should rarely equal or be very near the sales approach. If it is, they are backing it in.

2nd example:

Custom built infill home in a urban area.
Is the cost approach real? Yes, how accurate is it???? . Should it be at or near the sales approach......most likely not, unless you are backing it in. This is why appraisers say it supports....and most of the time it is much higher than the sales approach if done without any manipulation.

As for land values, you can be off by a lot, or you can be spot on. Varies.

So is the cost approach real? Yes. Just do not manipulate the data. If the cost approach is low, explain. If the cost approach is high, explain. The cost approach supports the sales approach. No weight was given to the cost approach and was only developed at the request of the client.

 

[Ariba]

I am posting this as a generality that every appraiser already knows. It can take 30 seconds to develop an opinion. However, that 30 second opinion is based on years of research.

It takes less than 1 second to know that the Cost Approach is BS

 

[Artemis Fowl]

It takes less than 1 second to know that the Cost Approach is BS

Generalize much? When you spend less than one second on it...you're probably right.

Took me more than a few seconds to understand that it works. I hadn't really had the opportunity to utilize it properly before. Now that I do...I get it...it works just fine.

 

[Tom D]

just a simple question. are your lenders asking for the full cost approach to be done. or you just need/want to show it's support of your value. my direct lenders don't ask for a full cost approach ever.
but i have plenty of pretty similar comps to feel comfortable with just my value.

 

[NC Appraising]

just a simple question. are your lenders asking for the full cost approach to be done. or you just need/want to show it's support of your value. my direct lenders don't ask for a full cost approach ever.
but i have plenty of pretty similar comps to feel comfortable with just my value.

Even for new construction?

Almost all of my clients want the cost approach if new construction.

A good portion of AMCs also require the cost approach...they require it just to avoid rejections from their lender clients. Just make the appraiser do more to avoid stips from the lender.

My State Board are also sticklers for the cost approach if new construction. Even if my clients do not require it for new construction, I still do it mainly to avoid any trouble with my state board.

psss what is a full cost approach? Is there a partial cost approach? LOL.