Is The Cost Approach A Real Thing?

[Tom D]

Simple question, how many times have any of you so-called experts on the cost approach favored the cost approach over the comparable sales approach? We are talking about mortgage transactions for a lender. I venture to say ZERO.

it's manna numbers from heaven, they always match pretty close i bet. i deal with financing and a lot of developers & general contractors don't get the cost always accurate, but we do.
anyway, never do it, never been requested to do it. did a lot of new construction, no one asked.
what i think is that with AMC work, if one lender asks for the cost approach, then AMC asks for it on everybody's appraisal just not to be bothered. it's your time wasted, not their valuable time.

sorry, but i have come out of the closet as an appraisal cost approach denier. can't hold it in anymore.
and my experience is rehabing, and building houses, i have done, and working with rehab financing for others.

 

[J Grant]

I am speaking on the behalf of the "Preferred Appraisers of America Association", a national organization that benefits the builder and the lender.

It is the belief of our organization that our appraisers must give all value to all of the upgrades, lot premiums, and must not deduct any builder concessions, especially not any rate buydowns that are artificially keeping prices high, etc. This benefits the buyer, builder, lender and agents. In turn, this keeps our appraisers employed.


If you are interested in joining our organization, please contact the AMCs or lenders and ask to join their panel of preferred appraisers. Remember, they have preferred appraisers because they know the builder's product better than anyone else. Wink.

I dislike AMC's, but I don't think that is the way it works. Preferred appraisers usually for an AMC are those who agree to work for X fee and turn time and are thus given the first crack at assignments.

A preferred lender for a builder is XYZ mortgage company, which also usually finances the construction for the builder and as a reward, if the designated "preferred lender" recommends to the builder's sales office, and if a buyer finances with them, they get perks such as paid closing costs or an upgrade package.

The mortgage company, in that case, typically hires an appraiser or appeasers just for that development project who rubber stamps each deal and price, probably working from a clone report, and they dump in the info and, I assume, matches every purchase price. Idk in some cases maybe a builder owns a mortgage company to finance their own inventory.

Many years back, I was offered a job doing that for a building lender and turned it down since I knew I wasn't going to hit every sale price. We did not even talk about that, they just asked I would be interested and that it paid less per order but you could use a template, they are fast to do etc. I politely said I did not think I would be right for it.

I have heard that as much as 80% of buyers use the preferred lender, so they never got an appasail looking for market value but rather a rubber-stamped price. The sold units are the comps for an outside appraisal if a borrower uses a different lender.

Builder prices can vary widely for the same model and not just because of options; idk if some borrowers get a good appraisal or use an outside elder or what the story is on that. Sometimes, the buyer raises prices on a phase then drops them again if they are not selling quickly. They will lower the price on the first sold and the last sold.

 

[Red Flint]

i have come out of the closet as an appraisal cost approach denier

Then go be with your Sales Tales, and don’t even think about bringing around your Gross Multipliers!

CA

 

[NC Appraising]

I agree. I only do the cost approach when mandated.

My points were mainly at the OP, which is a newer appraiser. We were taught to make the sales and cost approach to match or to be slightly above the sales approach. This is not correct.

My main point was that the cost approach can support the sales approach. Do not manipulate the numbers. If it is low, state why. If it is high, state why.

I just finished up to new construction appraisals. I used M&S online and https://dwellingcost.com/. Both came in way below the sales approach and this is for a tract home PUD. I had to keep upping up the quality ratings.....

In stable times and is tract home projects, the cost approach can be close to the sales approach. But then again, what to do with the upgrades. There are no upgrades in any of the cost manuals.

I do like to use the cost approach to support adjustments for condition for example.

Lastly, are there some situations where the cost approach is more reliable than the sales approach? Yes. Can we place the value on the cost approach....no.

 

[NC Appraising]

I dislike AMC's, but I don't think that is the way it works. Preferred appraisers usually for an AMC are those who agree to work for X fee and turn time and are thus given the first crack at assignments.

A preferred lender for a builder is XYZ mortgage company, which also usually finances the construction for the builder and as a reward, if the designated "preferred lender" recommends to the builder's sales office, and if a buyer finances with them, they get perks such as paid closing costs or an upgrade package.

The mortgage company, in that case, typically hires an appraiser or appeasers just for that development project who rubber stamps each deal and price, probably working from a clone report, and they dump in the info and, I assume, matches every purchase price. Idk in some cases maybe a builder owns a mortgage company to finance their own inventory.

Many years back, I was offered a job doing that for a building lender and turned it down since I knew I wasn't going to hit every sale price. We did not even talk about that, they just asked I would be interested and that it paid less per order but you could use a template, they are fast to do etc. I politely said I did not think I would be right for it.

I have heard that as much as 80% of buyers use the preferred lender, so they never got an appasail looking for market value but rather a rubber-stamped price. The sold units are the comps for an outside appraisal if a borrower uses a different lender.

Builder prices can vary widely for the same model and not just because of options; idk if some borrowers get a good appraisal or use an outside elder or what the story is on that. Sometimes, the buyer raises prices on a phase then drops them again if they are not selling quickly. They will lower the price on the first sold and the last sold.

J, I agree with you on new construction, no doubt. We see eye to eye.

That being said, I always bring receipts. Unfortunately, when the owner of the AMC called me, I did not record the phone call, so I cannot post it here. I have also personally asked multiple AMCs and lenders and they said yes.

You may have taken my joke a bit too seriously.

Do AMCs and lenders have preferred appraisers for new construction? Yes. Will all of them have a file noting "preferred appraisers"? No. This is similar to AMCs and lenders having a said list or an unspoken list for appraisers that have experience in complex properties or appraisers that "come in low".

Even Dwiley said this exists. I remember him posting about it a long time ago. He said AMCs have preferred appraiser or use certain appraiser for new construction homes because they have better knowledge of the product.

As for my conversation with the owner of the AMC, he basically said that they have preferred appraisers (or whatever you want to call it). Maybe some appraisers work out deals for work, but not this one. He said some appraisers do not like doing new construction work..... obvious reasonings here. I do work for this AMC, mostly refis and resale work, few new construction work. They would only send me a new construction order for a new PUD when it was one of the first lots to be released. I guess they wanted to have another appraiser to do it in case they get reviewed. I asked him straight up of they had a preferred panel for new construction work, and he said yes.

Two of my other lenders are preferred lenders for this same builder. Do I get any new construction work? No. I came in low too many times.

I am not saying all are like this. But you have to think and realize how much business is on the line for these lenders. The LO are wining and dining the builders, and are treated like royalty by the lender because they bring in so much business. These lenders even give around $2-4k in seller concessions to the buyer. This is big business. So if you really think that they are going to let some **** on appraiser ruin this relationship.....no. Same for the AMCs. It is good money for them too. Do you really think the lender is going to let the AMC use appraisers that kill their deals?

There is a club, spoken and unspoken. Sometimes you have to ask to join and sometimes it falls in your lap as a test....do not kill any deals, you become part of the club.



Lastly, one of my lenders use a Round Robin system. Direct lender. How is it that they use a round robin system, but somehow I do not get any new construction orders.....but I get refi and resale work. When I asked the appraisal UW at the bank, she could not answer that question.

 

[Artemis Fowl]

So to summarize for most of you: The Cost Approach is crap because the clients you usually work for don't require it or give it much credence.

Allow me to paraphrase: Cancer doesn't exist because I never got it.

Same logic. Ya'll good rolling with that then? Cause that's what you're doing. I'm gonna call it Cost Derangement Syndrome.

 

[NC Appraising]

So to summarize for most of you: The Cost Approach is crap because the clients you usually work for don't require it or give it much credence.

Allow me to paraphrase: Cancer doesn't exist because I never got it.

Same logic. Ya'll good rolling with that then? Cause that's what you're doing. I'm gonna call it Cost Derangement Syndrome.

Not saying it is crap. It usually supports the value. In rare cases, if I could, I would put the most weight on the cost approach. They will not let me.

The sales approach (comps) is what buyers use and not the cost approach. In 90% of the assignments, the sales approach is the best approach. So why include an additional approach that buyers and sellers do not use just to support the sales approach, which is usually less accurate?

Sometimes we have to separate book theory from reality.

 

[Artemis Fowl]

Reality? Maybe try to acknowledge that your reality is not the same as others in the industry.
I use the cost approach everyday because it is determined to be credible enough for the purpose and intended use of its value indication. It works just fine for what it is.

 

[alebrewer]

it's manna numbers from heaven, they always match pretty close i bet. i deal with financing and a lot of developers & general contractors don't get the cost always accurate, but we do.
anyway, never do it, never been requested to do it. did a lot of new construction, no one asked.
what i think is that with AMC work, if one lender asks for the cost approach, then AMC asks for it on everybody's appraisal just not to be bothered. it's your time wasted, not their valuable time.

sorry, but i have come out of the closet as an appraisal cost approach denier. can't hold it in anymore.
and my experience is rehabing, and building houses, i have done, and working with rehab financing for others.

Welcome to the dark side.

 

[alebrewer]

So to summarize for most of you: The Cost Approach is crap because the clients you usually work for don't require it or give it much credence.

Allow me to paraphrase: Cancer doesn't exist because I never got it.

Same logic. Ya'll good rolling with that then? Cause that's what you're doing. I'm gonna call it Cost Derangement Syndrome.

For me it has nothing to do with whether or not clients require it - although if you're reporting on the 1004, you're certifying you put 100% of your weight on the SCA, so developing and reporting the CA is just increasing the work exposed to scrutiny. That said, the reason I have, for most of my career, found the CA to lack credibility is that it is too easy to manipulate. There are too many moving parts - local multipliers, straight line depreciation (which doesn't exist), estimating TEL and EA, contributory value of site improvements, estimating entrepreneurial incentive. I know folks will say all of those items are 'market derived' but - IMO - that's just being milktoast about it.

Ok - off my soapbox. I DO think there are assignments where the CA may be the most credible way to develop an opinion - but (a) that just means the opinion is worthless, and (b) it's probably not residential. IMO