New Build

[BRCJR]

I disagree with ou if it is a market value purpose appraisal.

The fundamental principle of appraising is cost does not always equal value. If a person spends 400k for the lot and 600 k to build new, an outlay of $1,100,000/ How can you form an opinion of its value, , if the owner tried to sell it tomorrow without seeing what similar homes sold for (and are listed for - the competition)
That home might get 900k in the open market, or one million, or $1,200,000.

Keep in mind I did not indicate rely only on the cost approach....

I am of the opinion a properly executed cost approach should yield market value. Just as any other approach should do.

I am not of the camp it "tends to set upper limits to value".

If a cost approach is higher than the sales comparison, then is it feasible to build? Happens all the time.

Freddie Mac says:

Cost approach
The cost approach is required for appraisals of Manufactured Homes. It is not required for all
other property types. (See Section 5703.6 for Manufactured Homes requirements.)

The Seller may request the appraiser to develop and report the cost approach when not required for
the transaction. The appraiser must develop and report the result of any approach to value that is
applicable and necessary for an appraisal, even if the Seller did not request it.

In markets with unique property styles, a lack of comparable sales, or the presence of unique
features such as outbuildings, the cost approach can provide support for adjustments made in the
sales comparison approach. The cost approach may be appropriate especially when appraising
properties that are:

▪ New or proposed construction
▪ Under renovation
▪ Unique because of property features (e.g., outbuildings, stables, pole-barns, or
shops)
▪ Unique because of their styles or construction methods (e.g., barn conversions
(“barndominiums”), “shouses” (living-space and work/storage combinations), berm homes, log homes,
or geodesic dome dwellings), or
▪ Not typical for the market area or have functional obsolescence

When the cost approach is developed, the appraiser must make proper adjustments for any items
detrimental to stability or marketability, such as physical, functional and external depreciation
that are not typical for the market area.

Appraisals that rely solely on the cost approach for the opinion of market value are unacceptable.

Freddie also says:

Reconciliation

The data and information presented in the appraisal report must justify and support the appraiser's
opinion of market value. The appraiser must explain how the final value conclusion was determined,
and the rationale must be consistent with the comments, conclusions and assumptions stated
throughout the appraisal report.

The reconciliation must contain any conditions of the appraisal on which the final opinion of
market value is based.

If the subject transaction involves sales or financing concessions, the appraiser's opinion of
market value must reflect the value of the subject property without the concessions. The appraiser
must also provide the dollar value of the concessions as a
comment in the appraisal report.

 

[J Grant]

I recently had a similar situation on one of the popular local lakes. Borrower had bought the property several years ago, for a then unsupportable price. Very small lot, with the house taking up almost 100% of the buildable area and the drain field needed to be located across the road on a neighbor's property and the supply line will be jetted under the road. Construction costs including a lot of higher end finishes was approaching $1.5 Million. Was able to support the land costs, using Marshall & Swift was able to nearly support the construction costs and also did the sales approach while admitting none of the sales were really comparable.

Discussed it my client and they said we are going to make the loan, so complete the appraisal and let the chips fall where they may. In my reconciliation I relied heavily on the cost approach and said, if this is what you want, and this is where you want it, then this is what it is worth.
Client accepted the appraisal with no comments and construction began last week. Dealing with non-AMC local lenders is great.

I don't let the client dictate the SOW for a credible appraisal.

Okay, your lender approved your appraisal based mainly on the cost approach, which "supported" a high price. What happens if that loan gets sold to an investor who orders a review on the appraisal? What happens if a year from now, the borrower defaults, and now the lender or investors examine your appraisal?

 

[CGinMN]

A cost approach isn't just land + cost manual = value. You have to account for market-based obsolescence and entrepreneurial incetivive, or lack thereof. How do you know hwo much the market will pay for those custom features? By analyzing sales. If you have sales to analyze to develop a credible CA, then you have sales to analyze for a credible SCA.

 

[J Grant]

A cost approach isn't just land + cost manual = value. You have to account for market-based obsolescence and entrepreneurial incetivive, or lack thereof. How do you know hwo much the market will pay for those custom features? By analyzing sales. If you have sales to analyze to develop a credible CA, then you have sales to analyze for a credible SCA.

Maybe they have sales, but the sales do not "support" the target desired value.

there are market areas where perhaps a new custom build is an over-improvement -

 

[BRCJR]

Q. How do you know how much the market will pay for those custom features?

A. Talk with/interview a custom builder or real estate agent if sales data is limited.

 

[J Grant]

Q. How do you know how much the market will pay for those custom features?

A. Talk with/interview a custom builder or real estate agent if sales data is limited.

A custom builder knows how much the market PAYS as cost. Not what those features recoup in the sale of the finished custom home on the open market.

A RE agent - trust and not trust their info - it is a support not a substitute for sales.

 

[CGinMN]

Builders and agents sell dreams to individuals. Appraisers give us the market reality.

 

[BRCJR]

Builders and agents sell dreams to individuals. Appraisers give us the market reality.

And your appraisal reality is based upon the sales of those dreams because it becomes market data. Go figure.

 

[alebrewer]

If you have sales to analyze to develop a credible CA, then you have sales to analyze for a credible SCA.

You know my thoughts on the CA, so this shouldn't be surprising... If you have sales to analyze to develop a credible SCA, then why even develop the CA at all?

 

[Overimprovement]

If a person spends 400k for the lot and 600 k to build new, an outlay of $1,100,000/ How can you form an opinion of its value,

Might want to change the batteries in your calculator...