No consideration for Cost Approach on a one month old property.

[BaamBaam]

I was completing a review of an appraisal on a multi-million dollar home. Under the final reconciliation comments, the appraiser stated; "The Sales Comparison Approach is the only approach to value used in this report. The Cost Approach is not used, since buyers in this market typically don't rely on depreciated cost to make buying decisions and the Income Approach is not used due to a lack of recent sales of comparable properties that were rented when sold." I can completely understand not considering the Income Approach in this case, based on the lack of market data of two-plus million-dollar, single-family rents in the market. But the comments regarding the justification for not considering the Cost Approach was a new one for me. The Cost Approach to Value section was completely blank. To add additional contacts, the appraisal was completed for refinancing on a property that had just been finished being built one month prior to the effective date of this appraisal report. I've seen some unique comments over the years, surrounding not considering the Cost Approach to Value. But this is a new one for me, especially on a custom-built home that was only one month old at that time.

 

[Joyce Potts]

I was completing a review of an appraisal on a multi-million dollar home. Under the final reconciliation comments, the appraiser stated; "The Sales Comparison Approach is the only approach to value used in this report. The Cost Approach is not used, since buyers in this market typically don't rely on depreciated cost to make buying decisions and the Income Approach is not used due to a lack of recent sales of comparable properties that were rented when sold." I can completely understand not considering the Income Approach in this case, based on the lack of market data of two-plus million-dollar, single-family rents in the market. But the comments regarding the justification for not considering the Cost Approach was a new one for me. The Cost Approach to Value section was completely blank. To add additional contacts, the appraisal was completed for refinancing on a property that had just been finished being built one month prior to the effective date of this appraisal report. I've seen some unique comments over the years, surrounding not considering the Cost Approach to Value. But this is a new one for me, especially on a custom-built home that was only one month old at that time.

Dear Baam Baam,

I completely agree with the original appraiser's comments addressing the cost approach. In fact, he stated why he eliminated it or didn't consider it, which is what USPAP calls for. Addressing why it was not developed is the key. Just because you may not agree with his opinion of the cost approach credibility doesn't make his analysis any less credible. The review, in most cases, is about USPAP compliance of Stds 1 and 2. Not if the appraiser does everything the same way you do. This assumes the subject property was not 'new construction'.

 

[CGinMN]

Do you believe the cost approach was necessary for credible assignment results? If not, I would move on.

 

[Mark K]

IMO, an appraisal of a one-month old custom home that excludes the cost approach lacks credibility and his "explanation" for its absence sounds like boilerplate and an excuse for being lazy.

 

[Joyce Potts]

IMO, an appraisal of a one-month old custom home that excludes the cost approach lacks credibility and his "explanation" for its absence sounds like boilerplate and an excuse for being lazy.

Where does it say in the original post it was a new or newer home?

 

[Dublin ohio]

Where does it say in the original post it was a new or newer home?

the appraisal was completed for refinancing on a property that had just been finished being built one month prior to the effective date of this appraisal report

 

[Dublin ohio]

I've seen some unique comments over the years, surrounding not considering the Cost Approach to Value. But this is a new one for me, especially on a custom-built home that was only one month old at that time.

I would have included the cost approach since the home was basically new. But regardless of what either one of us would do. Was the reasoning in the statement made in the appraisal wrong?

 

[KHS445]

I would have included the Cost Approach and if at all possible, I would have interviewed the contractor or the homeowner and preferably both. I would ask them for as accurate an estimate as they can provide of the cost to build and in the homeowner's case their total cost. I would also ask the contractor if with the cost of materials moving downward, how much of an impact would it have on the cost of the construction if stared today. The value of the lot would obviously be determined by the Sales Approach. Chances are a home in that value range has some unique features that may not appeal to all buyers.

My experience is that unless there is a pent-up demand for homes similar to the subject, the cost of construction and the Cost Approach will be somewhat higher than the Sales Approach. That said I would most likely discount or not assign any weight to the Cost Approach, as most potential buyers in this price range are looking for a certain property type and amenities, so only on a rare occasion would a buyer be willing to pay full cost for a newly constructed home. When the Cost and Sales Approach are either similar or inverted, in my opinion that is evidence of market where spec construction should be happening.

 

[KHS445]

While somewhat subtle and most likely unintentional, the OP is conducting a survey as to what would your fellow appraisers do. The only thing is the members of this forum are spread across the Country and what a fellow appraiser would do in Minnesota maybe different.

 

[CGinMN]

Given all the cost volatility and materials/labor shortages in the post Covid era, your cost manual might not hold up well, especially on a multi-million dollar custom construction. Even if it does, or if you had great cost comps, credibly estimating EI/EP, FO, EO, etc is no walk in the park. It can be done, but frankly when it comes to high end construction, I’ve reviewed a lot more cost approaches that lacked credibility than were credibly developed. Many simply parrot the builder’s costs. Even if you get to the point where you have something you think is credible, the sales approach will usually be given all the weight.