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Taking developer's cost at "face value"

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Steve Taylor

Thread Starter
Freshman Member
Joined
Jul 6, 2006
Professional Status
Banking/Mortgage Industry
State
Missouri
I'm looking at an appraisal of a recently renovated 3-plex. The appraiser did not include a Cost Approach and the reason given was that the developer's cost was "taken at face value". It doesn't seem to me like this would be a reasonable explanation. Isn't there a requirement that the appraiser compare the developer's cost to costs from a source like Marshall Swift to see if the costs are in line with market?
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
some facts from the post are confusing me
Estimate of what: the cost to do the renovation already completed or replacement cost new for the whole thing?
Cost estimate is not a cost approach

another thing that confuses me
How much reason could someone possibly need not to have a cost approach?
 

Mztk1

Senior Member
Joined
Dec 3, 2006
Professional Status
Certified Residential Appraiser
State
Florida
With USPAP, we are requireed to do what is necessary to provide a credible opinion of value. For Fannie the requirement on the cost approach reads like this:

"We will not accept appraisals that rely solely on the cost approach as an indicator of market value. In addition, we do not require the cost approach to value except for the valuation of manufactured homes."

Here is what FHA says:

If the subject property is new construction (less than one year old), or the
Cost Approach is recognized in the market as a basis for pricing, the
appraiser may complete the Cost Approach; however, it is not required for an
FHA appraisal. If, however, the subject is a unique property, has specialized
improvements, is manufactured housing, or the client requests the Cost
Approach be completed, then the Cost Approach is required and must be
completed. The square foot method is to be used.


So if the report is "not believable" without a breakdown of, and a check on the builder costs, than the appraiser should have provided his or her own analysis. I doubt that would be the case though. When I am in a similar situation I will usually report the list of improvements and the builder's stated cost, even if I don't do the cost approach. Cost does not equal value, and reporting the costs really just becomes a function of establishing and proving the condition rating. But in the final tally, the market determines the overall value for the property, not the builder costs.
 

Mountain Man

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
Georgia
I never take a developers cost at face value... that's a baaaad idea. Now I often agree with the developers cost, but I've compared it to Marshall as well as my own cost estimate from data in files. And yes, we actually track and keep records on what other developers spend.
 

Steve Taylor

Thread Starter
Freshman Member
Joined
Jul 6, 2006
Professional Status
Banking/Mortgage Industry
State
Missouri
some facts from the post are confusing me
Estimate of what: the cost to do the renovation already completed or replacement cost new for the whole thing?
Cost estimate is not a cost approach

another thing that confuses me
How much reason could someone possibly need not to have a cost approach?

It was confusing to me as well. It was a reference to the cost of the renovation and it was given as the reason the cost approach was not needed. This is a federally related transaction and I know the examiners look for 3 approaches and if one is not done they look to see if the elimination of it is explained. This was one explained but the explanation did not make sense to me. In any case the rest of the appraisal appeared to be done very well with a detailed market value and income approach so I'll just leave that issue alone and accept the cost approach as not necessary.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
This is a federally related transaction and I know the examiners look for 3 approaches
Those sound like some pretty poorly trained examiners. What: are they six months out of college and working off a checklist?
 

Steve Taylor

Thread Starter
Freshman Member
Joined
Jul 6, 2006
Professional Status
Banking/Mortgage Industry
State
Missouri
No. I stated that wrong. What I should have said is that examiners look for the 3 approaches and if one is not used then they want to see an explanation as to why that approach or approaches was eliminated.

Years ago they used to base that on the guidelines of R41c. "Correctly employ all recognized appraisal methods and techniques that are necessary to produce a credible analysis, opinon, or conclusion. Exclusion or omission of any recognized method for cause must be fully justified."

It looks like currently it would be based on the supplemental standards of statement 10.

Failure to explain the reason for excluding the sales comparison approach, cost approach, or income approach violates the applicable reporting rules [SR 2-2(a) or (b)(VIII).
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
I still haven't figured out the problem with cost in the assignment. Is the report saying it accepts what the contractor says he charged for renovations? I don't see what difference that makes. It can't be that he is using a contractor estimate of cost in the cost approach if he doesn't have one?

As for R-41c, I didn't know anyone remembered that.

FWIW, I always read "every recognized method" to mean the ones that were recognized for the type of value of type of property involved; to mean that the method was recognized as relevant and reliable. For example, some say there are five and some say there are six methods for coming up with a land value. It never occured to me that someone doing a cost approach using sales for the land value, was required to explain why the other five methods were not also developed. Or that someone appraising a house was required to explian why DCF was used. Because not every single thing in the catalog is "recognized" for every type of appraisal problem.

I think this carried forward to USPAP, which for almost all of its first 20 years said one must explain not using one of the "usual" approaches. I never read that to mean explaining not using any of the unusual approaches.

It is interesting to look at the entire paragraph from SMT-10, not just the one sentence.

"Omitting an approach to value that would be completed by an appraiser’s peers in the same or a similar assignment and would also be an expectation of parties who are regularly intended users for a similar assignment, violates the SCOPE OF WORK RULE. For example, using other approaches while failing to develop an indication of value by a sales comparison approach [SR 1-4(a)] when there are sufficient sales for analysis and the market response to the property is best indicated by sales analysis violates the SCOPE OF WORK RULE."
 
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