Sales Comparison Grid & Cost to Cure

[J Grant]

They taught various methods for calculating adjustments in all three of the approaches to value - never once have I used, been taught, or even heard of (until two days ago) applying a cost based adjustment in the sales grid. 7 years - more than 2,000 appraisals. Cost based adjustments aren't the mystery here - using them as the basis for line item adjustments in the sales grid (sales comparison approach) is. Huge red flag - but hey, way easier. I hope this is standard / acceptable practice because it would be WAY easier to base adjustments on costs than endlessly digging through comps for, you know, market derived / supportable adjustments.

They don't teach using the CA on the sales grid because, it sales are market price reaction, not what it costs - That said, there are certain situations where cost is the best support for what the most probable amount of market reaction - but it can never be certain which is why I only use a string cost adjustment sparingly, in low-cost situations and either make no adjustment it and explain why or adjust it the amount of the cost-

If the cost to replace or repair becomes larger to the point it materially affects value or changes who the buyer is ( such as so much repair cost it changes the typically motivated buyer away from owner occupant to investor/flipper )

I hope you do not default to just throwing cost as the adjustment all the time. There are some appraisers who do this, with no regard to whether the market is paying more or less than that amount or whether the same buyer would show up to do a host of major repairs vs a minor single repair.

There usually is no way to find enough sales or any sale as a comp with a part-finished roof. So the next logical question is how much does it cost for the labor crew to show up and install it? These days everything is searchable online and if we get a rough idea from a search, the buyer can find the same info. Some buyers will simply not buy a property needing any work at all. So it does reduce the buyer pool somewhat. However, paying a crew to install the tile is not some huge investment in time or sweat from a buyer and some might want the house anyway.. Whether they would pay the equivalence of the cost or want more of a discount for the aggravation, idk.

One way to handle these situations when it is not possible to tell is to make no adjustment and simply reconilce it a the lower end of value with the expectation most buyers would want some kind of discount fro it, whether the exact cost or something greater. That can be confirmed by asking area RE agents and past knowledge of properties needing some kind of equivalent repair.

 

[J Grant]

I usually make a market-based reaction and not cost on the grid however most clients ask for a cost to replace or repair X in the narrative comments.

What does the client want that for, and what do they do with it ? Well, they never share that info with us, but I suspect that they might want it for a couple of main reasons-
1) as a check on our adjustment - if we say it costs 30k to install a new pool and we adjust it for 10k, or 60 k they might question our adutment.

2) The lender might use the cost to repair or replace a property for a loan. Maybe the lender /client has a threshold for loan decisions - they will lend on a replacement or repair cost up to 50k or 10% of the value, etc. . If they do decide that way they don't share it with us just mentioning it as a point of interest.

PS, I am sure others have experienced this - walking through a property the owner or RE agent throws out some ridiculous amount they spent on a kitchen or whatever. I never argue with them, just say thanks for the info, but I know a Home Depot quality kitchen cabinets maybe cost 20k to install and finish an not 100k- we put typical price to get it done, not always what owner told us they spent (since they stretch the truth half the time as if we were idiots - yeah sure that ordinary toilet one can get for $300 cost you 3k)

 

[Terrel L. Shields]

endlessly digging through comps for, you know, market derived / supportable adjustments.

OK - so I assume you have homes with pools. Pools are very individualistic. And if you extract or 'paired sales' - how precise is that? I mean there are $50,000 pools, $80,000 pools and $250,000 pools. I appraised a home that had an indoor pool room, heated, faulted ceiling with wood beams, a waterfall, lights, etc. And I've appraised another indoor pool enclosed in a metal frame building and pretty much bare minimum. How do you find similar pools? How accurate is that? Is it practical to spend a week hunting up such sales? Same for shop buildings, detached garages, and horse barns. They are not good proxy for each other. A cost related adjustment has to be more accurate than speculating about some arbitrary "paired sale" or thinking you can divine an appropriate proxy for some item dissimilar to the subject. Or, supposedly we could ignore an adjustment...and your client says no, do not ignore this.

we do so as lump sum supplemental adjustments in the cost approach with detailed explanation in the addendum.

But if you adjusted in the cost approach??? How do you not adjust in the other approaches? Do you hunt for a house with on-going roof replacement? How time consuming is that and again, is that equivalent? I mean one might have 4 different pitches and dormers and the other is a straight gable roof. You cannot equate the cost of one with the other.

the OP's client asked them to ADD an adjustment that was not there before !!

If addressed in the cost approach, then it should be addressed in the sales comparison approach wouldn't it?

They don't teach using the CA on the sales grid because, it sales are market price reaction, not what it costs -

That is not in the textbooks. there are at least 7 ways to make an adjustment. And the two divisions are qualitative and quantitative. You cannot divorce "value" from cost. While a cost may suffer discount in excess to wear and tear, it is rarely totally ignored. There is a relationship between the cost of something and its contributory value if it is at its HBU. That is textbook appraisal and I am talking about adjustments in the sales comparison approach - from the textbook...
Qualitative

Relative Comparison​

Ranking analysis​

Personal interview​

Quantitative

Paired data set​

Statistical analysis​

Graphic analysis​

Trend analysis​

Cost related analysis​

Secondary data analysis​

 

[J Grant]

The ways to make an adjustment, interviews etc ii how we get there, the end result is still supposed to be a market reaction based in the SCA if we use a SCA.

Market value is defined as what the property should bring in assumed sale transaction in - not what it costs to build or replace ( though that can be valuable as indicators )

If an appraiser wants to base a value on cost as the sole indicator, they could do so but then dont' say it was based on comp sales if it was not.

 

[Terrel L. Shields]

be a market reaction based in the SCA if we use a SCA.

When will you learn the fundamental that SALES are market data. COSTS are market data. INCOME and EXPENSES are market data. "Market" is not exclusive to the Sales Comparison approach. IN FACT, they once called the Sales Comparison Approach the "Market Approach" until someone pointed out that "Market data" are all data in the market. Cost, income and sales. Again - the list above is for ADJUSTMENTS IN THE SALES COMPARISON APPROACH. They have nothing to do with the Cost nor income approaches.

 

[J Grant]

When will you learn the fundamental that SALES are market data. COSTS are market data. INCOME and EXPENSES are market data. "Market" is not exclusive to the Sales Comparison approach. IN FACT, they once called the Sales Comparison Approach the "Market Approach" until someone pointed out that "Market data" are all data in the market. Cost, income and sales. Again - the list above is for ADJUSTMENTS IN THE SALES COMPARISON APPROACH. They have nothing to do with the Cost nor income approaches.

You keep calling costs market data, but costs are not the "market" - because it is not sales. Income is market data but the subject of the thread is not the income approach.

It cost me $10 for ingredients to make a cake and if I want to add in a profit for my time and effort, it cost $15.

What can I sell the cake for in a bakery? The customers coming in the bakery are The MARKET for my cake. Regardless of what it cost me to make, they are used to spending $14 for similar cakes and will not pay any more.

 

[Zoe]

You keep calling costs market data, but costs are not the "market" - because it is not sales. Income is market data but the subject of the thread is not the income approach.

It cost me $10 for ingredients to make a cake and if I want to add in a profit for my time and effort, it cost $15.

What can I sell the cake for in a bakery? The customers coming in the bakery are The MARKET for my cake. Regardless of what it cost me to make, they are used to spending $14 for similar cakes and will not pay any more.

That is the way liquidation and REO are done J. The addendum has a cost to cure sheet that is used in the sales comparison approach.

Your typical buyers and sellers look at cost as an indicator of value. Yes, entrepreneurial incentive is included in the cost estimates and used in sales comparison approach adjustment.

 

[J Grant]

That is the way liquidation and REO are done J. The addendum has a cost to cure sheet that is used in the sales comparison approach.

WRONG. I have done many REO appraisals. Just because they ask for a cost cure does not mean we are supposed to put the cost to cure on a grid in the SCA of an appraisal done for an REO property. LV would be the same - market value based on a SCA uses sales and in sales an adjustment comes from what buyers would pay - if the appraiser feels the cost is what a buyer would pay then that is the reason for using it in the SCA grid


Otherwise, the CA is an additional indicator, in it own section.

 

[Zoe]

WRONG. I have done many REO appraisals. Just because they ask for a cost cure does not mean we are supposed to put the cost to cure on a grid in the SCA of an appraisal done for an REO property. LV would be the same - market value based on a SCA uses sales and in sales an adjustment comes from what buyers would pay - if the appraiser feels the cost is what a buyer would pay then that is the reason for using it in the SCA grid


Otherwise, the CA is an additional indicator, in it own section.

Your comps are going to vary in condition to the cost estimates, so not every comp will get the same cost estimates.

Let's say subject needs a roof. Comp 1 has a new roof Comp 2 needs a new roof. Cost of new roof is $7,000. That is strictly an indicator of value between the two comps and subject. You add for profit incentive. We will say $7,000 cost and 15% profit entrepreneurial incentive. Most builders get around 10% to 20% profit incentive.

 

[Zoe]

WRONG. I have done many REO appraisals. Just because they ask for a cost cure does not mean we are supposed to put the cost to cure on a grid in the SCA of an appraisal done for an REO property. LV would be the same - market value based on a SCA uses sales and in sales an adjustment comes from what buyers would pay - if the appraiser feels the cost is what a buyer would pay then that is the reason for using it in the SCA grid


Otherwise, the CA is an additional indicator, in it own section.

I promise you I have done way more REO and liquidation assignments than you. Memphis was foreclosure and bank fraud capitol of the world.

Question me? The GSE liked my work. Mortgage fraud was rampant in Memphis, hence many foreclosures and liquidations.