Is The Cost Approach Flawed?

[Mr Rex]

How does the boat get to the second floor?? lol


Once again, the issue is NOT a failure of the methodology but the practitioner. Just because an area is built-up and there are no land sales, land still has value. There are methods and techniques to perform that analysis.


I have performed quite a few feasibility analysis reports, pre-construction appraisals and have worked with many developers and investors. The cost analysis use in my reports comports very well with that of many industry participants so I don't understand where is the issue.

Maybe you actually know what you are doing. I'd dare say the majority of appraisers do not, not that it really matters. That is my point.

 

[ucbruin]

Maybe you actually know what you are doing. I'd dare say the majority of appraisers do not, not that it really matters. That is my point.

Now that's funny!!!

 

[Ariba]

Please someone explain by using the cost approach the median price of a house in Cincinnati, OH at $156,800 and Denver, CO at $384,300. The cost of building materials, labor, and land cannot explain this $227,500 difference which is more than the US median house price of $207,600.. I know it is a stupid question, but please provide a rational explanation.

 

[Michigan CG]

Please someone explain by using the cost approach the median price of a house in Cincinnati, OH at $156,800 and Denver, CO at $384,300. The cost of building materials, labor, and land cannot explain this $227,500 difference which is more than the US median house price of $207,600.. I know it is a stupid question, but please provide a rational explanation.

The median price of a home in any location does not really tell us anything as accrued depreciation is a big factor in many homes. The better question would be what is the cost NEW of a home in Cincinnati, OH vs that of Denver, CO.

 

[Ariba]

The median price of a home in any location does not really tell us anything as accrued depreciation is a big factor in many homes. The better question would be what is the cost NEW of a home in Cincinnati, OH vs that of Denver, CO.

Same question, so what is the answer?

 

[glenn walker]

How does the boat get to the second floor?? lol


Once again, the issue is NOT a failure of the methodology but the practitioner. Just because an area is built-up and there are no land sales, land still has value. There are methods and techniques to perform that analysis.


I have performed quite a few feasibility analysis reports, pre-construction appraisals and have worked with many developers and investors. The cost analysis use in my reports comports very well with that of many industry participants so I don't understand where is the issue.

Howard I understand the lot has value in fact one I just completed was a 1,500 Square foot California Bungalow located on a 5,000 square foot lot. The property also had a 400 square foot garage. The property sold for $900,000 and I had 5 similar age and size homes also located on 4,500 to $5,500 Sq.Ft. lots. No land or lot sales in this area since about 1950 with a few exceptions of fire damaged but those were rebuilt by insurance . So client wants cost approach and based on quality of construction the replacement cost new was between $165-$175 per square foot on the dwelling and $35-$38 on the garage. Estimated cost new at $175.00 $262,500-Garage=$15,200= Total estimate cost new =$277,700-- Next physical depreciation estimated at 50%=$138,850 and functional at 5% or $6,943.00- "As-Is" value of site improvements $30,000 - Indicated value by Cost Approach is $912,000. OK no lot sales in 30 years so if I use the extraction method or a variant of the Land Residual Method the Opinion Of Sire Value is $750,000 divided by the 5,000 Sq.Ft. lot size is $150.00 per Sq.Ft.

My concern is when a State Board reviews an-appraisal they expect the lot or land value estimate to be supported by lot or land sales and in many of our appraisals these are fully developed areas so it's not possible.

The real answer is the cost approach in some of these is not dependable and should not even be completed or relied on but many clients want it and have n issue but in the event a State Board review was completed I have seen other appraisers get nailed for not supporting site value with land or lot sales. ** Below is one of the statements I use but don't feel that comfortable with either is or the other ones which state the lender client should not rely on it due to lack of land sales and difficulty in estimating remaining physical life because many of these homes are 75 to 100 years old. Whats your opinion on the Statement below ?

The Subject's market area is almost completely built out, therefore the Extraction Method, a variant of the Land Residual Method, will be used to estimate the Subject's Site value. A nominal price of XXXXX per square foot of site area was derived and shown below as the site estimate. Market responses to lot size and site utility are a function of
the consideration of the property as a whole

 

[Terrel L. Shields]

please provide a rational explanation

The value of the land. Period. You are buying rights to the land not the house. The value of the land relates to physical attributes to some degree but more importantly it relates to location, location, location. Access, to jobs, schools, etc. View, quiet enjoyment of the property. The economic factors are the local economy. If the average San Francisco resident made $28,000 per year do you think housing there would be $1,000,000+ high? OTOH, in Adair County, Oklahoma where incomes are really low, why do you think a lot in town won't cost $10,000? And further, a new house is likely to bring no more than the cost to build plus land value which is why you see no spec construction there. And there are virtually no homes even with substantial land that cost over $200,000. Very von Thünen concept.

http://www.sjsu.edu/faculty/watkins/thunen.htm

 

[Ariba]

The value of the land. Period. You are buying rights to the land not the house. The value of the land relates to physical attributes to some degree but more importantly it relates to location, location, location. Access, to jobs, schools, etc. View, quiet enjoyment of the property. The economic factors are the local economy. If the average San Francisco resident made $28,000 per year do you think housing there would be $1,000,000+ high? OTOH, in Adair County, Oklahoma where incomes are really low, why do you think a lot in town won't cost $10,000? And further, a new house is likely to bring no more than the cost to build plus land value which is why you see no spec construction there. And there are virtually no homes even with substantial land that cost over $200,000. Very von Thünen concept.

http://www.sjsu.edu/faculty/watkins/thunen.htm

Land alone is not the answer period. Also, the question is not what the average income is for buyers, but what is the average cost of labor. I would venture there is not a significant difference between framers in Denver, Detroit, Cleveland, Etc or the cost of a 2"x4". Land alone is not the answer period.

It all goes back to the original post, The CA is flawed and serves no purpose it all in a metropolitan area. Another factor of why the CA is flawed is that in my market area if you bought a new house or built a new house today the delivery would be 7-9 months away.. So now you have to figure out the cost of money, inflation, mortgage interest rates, supply and demand 7-9 months in the future. Good luck..

 

[Mr Rex]

Cost approach are akin teats on a boar hog. Every single report can have one and every male mammal has them, the latter are 100% useless every time, the former? Less than a singnifiicant digit?.

 

[Joe Flacco]

Howard I understand the lot has value in fact one I just completed was a 1,500 Square foot California Bungalow located on a 5,000 square foot lot. The property also had a 400 square foot garage. The property sold for $900,000 and I had 5 similar age and size homes also located on 4,500 to $5,500 Sq.Ft. lots. No land or lot sales in this area since about 1950 with a few exceptions of fire damaged but those were rebuilt by insurance . So client wants cost approach and based on quality of construction the replacement cost new was between $165-$175 per square foot on the dwelling and $35-$38 on the garage. Estimated cost new at $175.00 $262,500-Garage=$15,200= Total estimate cost new =$277,700-- Next physical depreciation estimated at 50%=$138,850 and functional at 5% or $6,943.00- "As-Is" value of site improvements $30,000 - Indicated value by Cost Approach is $912,000. OK no lot sales in 30 years so if I use the extraction method or a variant of the Land Residual Method the Opinion Of Sire Value is $750,000 divided by the 5,000 Sq.Ft. lot size is $150.00 per Sq.Ft.

My concern is when a State Board reviews an-appraisal they expect the lot or land value estimate to be supported by lot or land sales and in many of our appraisals these are fully developed areas so it's not possible.

The real answer is the cost approach in some of these is not dependable and should not even be completed or relied on but many clients want it and have n issue but in the event a State Board review was completed I have seen other appraisers get nailed for not supporting site value with land or lot sales. ** Below is one of the statements I use but don't feel that comfortable with either is or the other ones which state the lender client should not rely on it due to lack of land sales and difficulty in estimating remaining physical life because many of these homes are 75 to 100 years old. Whats your opinion on the Statement below ?

The Subject's market area is almost completely built out, therefore the Extraction Method, a variant of the Land Residual Method, will be used to estimate the Subject's Site value. A nominal price of XXXXX per square foot of site area was derived and shown below as the site estimate. Market responses to lot size and site utility are a function of
the consideration of the property as a whole

There are no new homes being built?