Question regarding Cost Approach!

[Mztk1]

First, the M&S cost guide does include entrepreneurial profit. Page D-8 breaks it down to 12.6% for average quality house and states "The 12.6% listed for general contractor's overhead and profit is the percentage of the total cost. This is the equivalent of 14.8% of the labor, material and subcontract cost, excluding costs of plans, survey, plan check and permit, with a range from 10.2% to 20.8%."

What that means precisely (especially the 10.2% to 20.8% part), I haven't a clue.

When I was first coming up the rule of thumb was for older houses the cost approach SHOULD be higher because if it wasn't the buyer should, by principal of substitute, choose new(er), or less depreciated, construction. But for new construction the cost approach should come out a little lower or the builder would have little incentive to build.

I wouldn't worry about it too much. In this market if the cost approach is coming in really, really low, it will raise a red flag for me to look into the market a little more suspiciously. But because most builders are having to cut their profits, I find it is common for the cost approach to come in high and then have to take economic depreciation for market conditions.

 

[Michigan CG]

First, the M&S cost guide does include entrepreneurial profit.

That is the first time I have ever seen anyone say that M & S includes EP.

 

[CANative]

It doesn't include EP and it says so right up front. The contractor profit and overhead is just that. What the contractor should make for buying 2x4's and pounding nails. The guy with the big idea gets the EP. If the contractor is the one with the big idea he gets his building profit plus he should get the profit realized at the time of sale (EP). If he makes 5% and doesn't see any change in the market he might expect to make 5% on the next project (EI) and that is the figure I think we should be using in the CA.

 

[The Warrior Monk]

When I was first coming up the rule of thumb was for older houses the cost approach SHOULD be higher because if it wasn't the buyer should, by principal of substitute, choose new(er), or less depreciated, construction.

This isn't necessarily true. In fact, rumor had it that when that some national firm do the assessment in the town where I do the majority of my work, they also thought this, which is the reason why many of the properties with older homes where grossly underassessed.

 

[Fred]

When I was first coming up the rule of thumb was for older houses the cost approach SHOULD be higher because if it wasn't the buyer should, by principal of substitute, choose new(er), or less depreciated, construction. But for new construction the cost approach should come out a little lower or the builder would have little incentive to build.

Terry, how's that for voodoo and fables?

Jim, maybe that is the principal, but the princple says something else.

I have to apologize in advance for my rigorous hold on sound reasoning, but it would seem to me, if anyone had any empirical studies to support that so-called rule of thumb, then within the studies one would be able to find the means for eliminating the appraiser error that is causing the systematic bias. See what I am getting at? Random error would be distributed about a cental tendency. If the error is not random - you know, systematically high on one type of property and systematically low on another - the error is appraiser made.

I know the cost approach operates in its own universe, unfettered by the rules that govern the rest of humanity. Because anywhere else on the planet, even just a guy putting into a crosswind, they figure out how to compensate for systematic error - rather than create a Law of Wrongness.

 

[stefan olafson]

EP is not in M&S but if you don't address it in the report you are in violation of USPAP... I was not given a license to appraise in my home state because I did not address it! Even though throughout the report I indicated the market was down and people weren't building improvements like the subject property, there was no profit in it.....

In the educational manuals I've read and taught out of, in the cost approach you should comment on EP if it's present. Well, it wasn't, I didn't, and no license.

 

[incognito]

Avoiding wading into the piranha (Santora ) filled cost approach waters, I would only add that M & S is a GUIDE, not a construction cost BIBLE.

I have been taught that you look at Marshall and Swift for the figures to utilize in the Cost Approach and it is what it is.

It ISN'T what M&S says it is. It is what YOU say it is. If your local building costs, as determined by review of numerous new builder construction cost estimates, local costs, transportation costs, labor costs, local material shortages, etc., do not jibe with M & S, than M & S is not worth the cheap paper it is written on...

 

[Fred]

Avoiding wading into the piranha (Santora ) filled cost approach waters,

Avoiding the waters would have meant avoiding the personal dig, right? But no, you had to get your little spear gun and fire a shot into the water.

 

[PropertyEconomics]

Avoiding the waters would have meant avoiding the personal dig, right? But no, you had to get your little spear gun and fire a shot into the water.

Fear not Steven, his aim wasnt true ... not even a mark on your wet suit.

 

[Fred]

In the educational manuals I've read and taught out of, in the cost approach you should comment on EP if it's present. Well, it wasn't, I didn't, and no license.

I thought the stor was more complicated than that. Reviewers from the other side of the country making definitive statements about comp selection. Etc.