New construction and cost approach...

[JTip]

In the past 6 months in my market, I have seen a growing trend. New construction, with the increasing prices of building materials, new codes, etc., tends to have a cost approach higher than the sales comparison approach. This tells me that the market will not pay what it costs to build new but is justified by actual costs in the construction. Did I explain that right?

Can you use the cost approach as the best indicator of value when the tried and true sales comparison approach tells you different?

I can provide an example if needed.

Thanks all,
Shane



Be gentle folks, it's Friday and I have my first 'cold' of the year.

 

[Marcia Langley]

Can you use the cost approach as the best indicator of value when the tried and true sales comparison approach tells you different?

Shane,

Not for Fannie Mae. They require a sales based opinion.

 

[CANative]

It may be telling you that builders continue to work on projects started before what was to become a rapidly changing market and that oversupply is on the horizon. They'll start price blowouts on new homes to get cash to make payroll and pay vendors. This will deflate the MV of existing homes in the same neighborhoods.

 

[Mike Boyd]

Shane......your example is typical in a declining market.

By the way. Do you do appraisals in Hollidaysburgh(sic?)?

 

[JTip]

Wow, typical for a declining market......I see what you mean. Thanks ladies and gents.

Yes I do Mike. Hollidaysburg, no h , is home to our county courthouse and has a very nice historical district and downtown shops. Taxes are higher than surrounding areas and new home construction is very active with prices averaging 200-350K. Nice town. :happy:

Here is a link to a very nice zoning map of the Hollidaysburg area:

http://hollidaysburgpa.org/hollidaysburg/lib/hollidaysburg/images/zoningmap.jpg

 

[Fred]

This tells me that the market will not pay what it costs to build new but is justified by actual costs in the construction. Did I explain that right?

Cost is not value - works fine for me.

 

[moh malekpour]

If your cost approach to value was way below your market approach to value, diehard cost approach advocates would tell you that you were msissing the incentive or the profits for the builder but what they can say now to support the cost approach? What is missing here is the lack of H&BU analysis by the builder prior to starting the construction.
The result of cost approach to value is not the same as the market approach to value. The value by cost approach is not market value.

 

[CANative]

Moh... I'm thinking (right now, but I will probably change my thinking later) that EP is historical profits and EI is potetial future profit. If you use EI in the CA forumula, you should get something that resembles MV.

What is missing here is the lack of H&BU analysis by the builder prior to starting the construction.

Is that it, or is the missing link the builder's misreading of rapidly changing market conditions? When market condition are such that a builder sees no profit in what he's planning, he'll stop building until the market changes again.

 

[moh malekpour]

Greg,

Moh... I'm thinking (right now, but I will probably change my thinking later) that EP is historical profits and EI is potetial future profit. If you use EI in the CA forumula, you should get something that resembles MV.

agreed if you have a correct site value and correct depreciation

Is that it, or is the missing link the builder's misreading of rapidly changing market conditions? When market condition are such that a builder sees no profit in what he's planning, he'll stop building until the market changes again.

agreed but we are saying the same thing. missing of rapidly changing market is missing the marketability or the feasibility of building a new construction.