Replacement Cost-New on a factory modular home

[hastalavista]

I am completing my second high-end modular home in the last 30-days. Both are proposed construction. So this activity has prompted the following question:

Replacement Cost is defined as

replacement cost
The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout. (Dictionary of Real Estate, 4th ed.)

(my bold for emphasis)

Although I have the cost figures for my current assignment (as well as had them for my previous assignment), my inclination is that when completing the cost approach, it is appropriate to do so using traditional building techniques (and, therefore, use a traditional costing service as well as my own data from prior traditional stick & brick construction).

It seems to me that using traditional building methods achieves the following:
A. It is consistent with "using... current standards".
B. It reflects the actions of the typical market participant (who does not typically build a modular home).
C. It satisfies the lender's hazard insurance coverage considerations as it accurately reflects the cost to replace the existing improvement in terms of utility, style, materials, and quality.
D. (and, probably most importantly) It is credible (IMO) for a market-value analysis.

In the market I'm looking at, there does not appear to be a discount (stigma) for modular construction. It is a high-end home with approximately 90% completion in-factory and the remainder on-site. And, just so everyone is on the same page, a modular home is not a manufactured home and it must conform to all local building codes.

So, any differing (or concurring :new_smile-l opinions?

 

[David Mescon]

Denis, let's start at the beginning. We're talking about a residence. Very few people choose their home based solely upon its utility. Home buying for most people is an emotional experience. We tend to buy the home we like best. It appeals to us on an emotional level. It's not that the utility isn't important, but typically, we start our search based upon such things as location, price, size, bedroom and bath count, basic amenities, and work our way down to architecture, finish materials, etc... Why anyone would ever use replacement cost for single family residential appraisal is completely beyond me. Most people buy a particular house because they like or love that particular house, not just because it will serve their needs.

Your scenario is a shining example of why replacement cost should not be used in the appraisal of SFRs. I have never used replacement cost in the appraisal of an SFR. I have used it in the appraisal of commercial and industrial properties, and both small and large residential income properties.

I'm not necessarily convinced that you have an adequate amount of reliable market data to determine with any certainty that there is no stigma associated with a modular home, however, assuming you are correct, and there is no stigma, it would be logical that all new construction in your market would be of modular construction. Modular homes nearly always cost less to build than site-built homes - that's why people build them. If the market does not differentiate between site-built and modular construction, than the modular homes would yield an increased entrepreneurial profit, and what builder would intentionally make less money?

By the way, there are many different types of modular homes. Some modular homes are manufactured homes and some are not. Good luck with this.

 

[Don Clark]

By the way, there are many different types of modular homes. Some modular homes are manufactured homes and some are not. Good luck with this.

The only homes classified as a Manufactured home are HUD Code Manufactured Homes. Modular homes are clasified as Factory Built Homes. I have never heard of a modular not being built in a factory. Modular homes go way back. For example, the U.S. Government built many modular buildings and homed during WWII. I helped put one together that our church bought as surplus in the 1950's. We put it together for a parsonage.

Most people could not tell a modular home from a stick built unless they were told it is a modular.

 

[Rich Heyn]

Denis, let's start at the beginning. We're talking about a residence. Very few people choose their home based solely upon its utility. Home buying for most people is an emotional experience. We tend to buy the home we like best. It appeals to us on an emotional level. It's not that the utility isn't important, but typically, we start our search based upon such things as location, price, size, bedroom and bath count, basic amenities, and work our way down to architecture, finish materials, etc... Why anyone would ever use replacement cost for single family residential appraisal is completely beyond me. Most people buy a particular house because they like or love that particular house, not just because it will serve their needs.

Your scenario is a shining example of why replacement cost should not be used in the appraisal of SFRs. I have never used replacement cost in the appraisal of an SFR. I have used it in the appraisal of commercial and industrial properties, and both small and large residential income properties.

I'm not necessarily convinced that you have an adequate amount of reliable market data to determine with any certainty that there is no stigma associated with a modular home, however, assuming you are correct, and there is no stigma, it would be logical that all new construction in your market would be of modular construction. Modular homes nearly always cost less to build than site-built homes - that's why people build them. If the market does not differentiate between site-built and modular construction, than the modular homes would yield an increased entrepreneurial profit, and what builder would intentionally make less money?

By the way, there are many different types of modular homes. Some modular homes are manufactured homes and some are not. Good luck with this.

Modular homes are only "manufactured" homes in a very generic sense and appraisers can get themselves in serious trouble using the term generically. Specifically, the term "manufactured home" only applies to HUD-code homes and Denis is telling us that his subject is not HUD-code.

Modular homes encompass a very broad range of quality and cost. The statement that modular homes nearly always cost less to build than site-built may be true in your area, but that is simply not true in many cases, especially in the Northern California area in which Denis practices.

 

[Rich Heyn]

Most people could not tell a modular home from a stick built unless they were told it is a modular.

This is true of much modular construction, but there is some low-end stuff in the modular world, especially on-chassis modulars, that is more akin to run-of-the-mill manufactured homes.

 

[hastalavista]

David-

I appreciate your thoughtful response although I'm not fully persuaded by your argument regarding reproduction vs. replacement cost (but you make a good argument.

I'm not necessarily convinced that you have an adequate amount of reliable market data to determine with any certainty that there is no stigma associated with a modular home, however, assuming you are correct, and there is no stigma, it would be logical that all new construction in your market would be of modular construction. Modular homes nearly always cost less to build than site-built homes - that's why people build them. If the market does not differentiate between site-built and modular construction, than the modular homes would yield an increased entrepreneurial profit, and what builder would intentionally make less money?

(my bold)

In an ideal world where the same information is available to everyone, I would agree with the bolded statement above. For an owner-builder, a modular makes the most logical sense to me as well and if I were to build my own home, I'd certainly consider a modular vs. stick & brick.
But the logic of your argument fails because it assumes everyone has the same information. They don't. Not all owner-builders consider a modular option and it probably isn't in a contractor's best financial interest to suggest that option.
Newly constructed, individual-site spec-house building is basically extinct in many of my markets right now (Luxury building is an exception- and for that quality of building, it may be more cost-effective to site-build vs. modularize; if one could modularize a luxury home?). But when site-spec building returns, I will be surprised if we don't see more modular construction for the reasons you suggest.

One might wonder why modular homes are not built on a larger-scale; such in a tract development? I don't know for sure, but my guess is in a tract development, the economy of scale savings for stick & brick is greater than the production-cost savings of building the home in a factory setting.

I've seen no market reaction for custom-built modular homes vs. typical stick & brick homes in higher-end re-sale market. Although the data is limited, the results are very consistent.

:new_smile-l:

Rich-

Modular homes encompass a very broad range of quality and cost. The statement that modular homes nearly always cost less to build than site-built may be true in your area, but that is simply not true in many cases, especially in the Northern California area in which Denis practices.

That was actually the case in the previous assignment I did a few weeks ago.

 

[David Mescon]

This is true of much modular construction, but there is some low-end stuff in the modular world, especially on-chassis modulars, that is more akin to run-of-the-mill manufactured homes.

I haven't been involved in the industry for many years, however, back in the 70s and 80s many manufactured home builders offered two versions of each home - the mobilehome version and the modular home version. Essentially, the only differences were that the modular typically had a steeper roof pitch, the steel sub-frame was not integral, (i.e., the home was craned or slid into place, and the floor joists and sub-floor were of a heavier duty construction, (to compensate for lack of the integral steel chassis). Other than that, they were manufactured in the same plants, using the same materials, and largely the same techniques, (joints were nailed and glued; they were built in sections; and each section had to be able to maintain structural integrity over at least 500 miles of transport). The exterior walls were often thicker in the modular version, being 2X6 instead of 2X4.

 

[Rich Heyn]

I haven't been involved in the industry for many years, however, back in the 70s and 80s many manufactured home builders offered two versions of each home - the mobilehome version and the modular home version. Essentially, the only differences were that the modular typically had a steeper roof pitch, the steel sub-frame was not integral, (i.e., the home was craned or slid into place, and the floor joists and sub-floor were of a heavier duty construction, (to compensate for lack of the integral steel chassis). Other than that, they were manufactured in the same plants, using the same materials, and largely the same techniques, (joints were nailed and glued; they were built in sections; and each section had to be able to maintain structural integrity over at least 500 miles of transport). The exterior walls were often thicker in the modular version, being 2X6 instead of 2X4.

David,

I would agree with what you observed in the 70s and 80s, although after June of 1976 no one offered a mobile home version of anything. But there are also a number of modular builders that don't run HUD-code operations as well. Even many of the companies that offer both HUD-code and modular products now run separate facilities for each.

 

[David Mescon]

One might wonder why modular homes are not built on a larger-scale; such in a tract development? I don't know for sure, but my guess is in a tract development, the economy of scale savings for stick & brick is greater than the production-cost savings of building the home in a factory setting.

I've seen no market reaction for custom-built modular homes vs. typical stick & brick homes in higher-end re-sale market. Although the data is limited, the results are very consistent.

Through the years, I have toyed with the idea of developing a tract of modular homes, a number of times, and have had numerous discussions with builders and developers regarding the viability of such a development. The end result has always been the same - whether or not it is true, they perceive such properties to be stigmatized and are not willing to take the risk.

I have appraised a number of ICF homes in higher-end markets. They cost approximately fifteen percent more than wood frame buildings to construct. They are virtually fireproof, hurricane proof, tornado proof, and earthquake proof. They are about as quiet as an anechoic chamber. and more thermally efficient than anything I know of other than a well designed earth sheltered home. They are also completely termite proof and highly mold-resistant. They are also nearly indistuingishable, aesthetically, from wood frame homes. These homes, although costing more than comparable wood frame homes, have not realized any market premiums in my experience. This has translated into little to no entrepreneurial profit, sometimes, even resulting in a functional superadequacy.

Your market area may certainly be different than what mine were, but I thought I'd share my personal experiences.

As for the replacement vs. reproduction cost debate. I have never yet heard a convincing arguement for utilizing replacement cost, (with only a very few exceptions). People just don't buy homes that way, so why would we appraise them that way? Our job is to reflect the actions of typical buyers and sellers, and typical buyers and sellers just don't use utility as the primary determinant in their final purchase decision - all other things being equal, their final decision is nearly always based upon emotion. Who are we to remove that crucial element from the equation?

 

[Walter Kirk]

Since this is proposed construction It would seem that you would the dealers retail price plus any set up costs not included in the contract. To be certain that this cost is realistic you could use the dealers retail price of competing models.