The Cost Approach - North Carolina

[George Hatch]

CA often returns value indicators in excess of the SC. Not always, though.

 

[CANative]

The only reason the cost approach would not be close or in the ballpark of the sales comparison approach is because depreciation is not taken into consideration

That's not the only reason.

 

[Joe Flacco]

Yeah, I mean assuming everything else is done right it should be.

 

[Andrei Fin]

There were instances where it appeared that the builder was making massive entrepreneurial profit, and that certainly wasn't rolled into the building cost data. You would figure an efficient market would not allow that by bidding up the site value, but apparently some builders are more clever than our inefficient market.

 

[CANative]

There were instances where it appeared that the builder was making massive entrepreneurial profit, and that certainly wasn't rolled into the building cost data. You would figure an efficient market would not allow that by bidding up the site value, but apparently some builders are more clever than our inefficient market.

Try comparing your favorite published cost handbook to the CA BOE's AH531 tables which the BOE claims to include EI.

 

[George Hatch]

Contractor margins tend to be more stable than developer margins, but both run higher when the market is hot and run a lot cooler when the markets run cold.

The thing to bear in mind about the cost format Fannie uses in the URAR is that it's a bit abbreviated and it aggregates costs that are broken out separately in other cost formats such as are used for narratives or the commercial forms or even the 71a/71b apartment forms. For example, outside of 1-4 appraising we normally break out the indirects and developer profit elements separately from the hard costs. Depending on the database we're using we also apply location multipliers or make adjustments to account for the current market conditions when compared to the last time the costs were updated.

It's not the 5-second process that many appraisers use.

 

[J Grant]

Good point. Most of my appraisals have different value indicators from the different approaches to value. Sometimes by a little and sometimes by a lot.

I've told my clients on several occasions that based on the disconnect between the CA and the SC the proposed project was not financially feasible. Those borrowers sometimes go to a different lender and get the deal done anyway. Happens.

I wish as you state above, a big gap between value indicators and particularly between CA and SCA, appraisers did not try to close it by adding more EI or depreciation to make the approaches more similar . Allowing the gap to speak of the market would clearly show an imbalance to users/clients.

Imo for res at least, an income and expense statement can show if an investment property is viable better than a GRM since a GRM loops back to what may be over inflated sale prices.

With an income and expense statement /mortgage factored in shows if income lags behind owner expenses.- which was one of the tipping points of first domino in the housing crash, when to many e high purchase price investment properties (glitzy condos especially ) could not generate rental income to match the expenses - how long could an owner they keep putting their own $ into at negative cash flow.....

 

[Mr Rex]

An efficient market would have enough competition to eliminate the outlier builder making bank. In many rural areas, there is not enough competition and when outsiders move in their costs are higher due to travel costs etc. It's all in M&S in the minutia.

 

[sputnam]

New construction assignment in North Carolina. Client requires the cost approach on every SFR. This review on my desk comes with a minimum land value, and a blank C.A. In the comments on the cost approach section is the following remark:

"The Cost Approach was not developed due to the recommendation to the appraiser by members of the North Carolina Appraisal Board. The members of the appraisal board informed the appraiser that the Cost
Approach is considered unreliable. The appraiser was strongly encouraged not to attempt to calculate the Cost Approach to value."

The story I got from the appraiser, was that he had been in C.E and a member of the board was in class and made a declaration. This was supposedly not an official statement from the N.C. Appraisal Board.

Has anyone else run into this, or do this? I'd like to gather some local knowledge. Thanks everyone.

I've been an NC Appraiser for many years. Never heard a word about any nonsense like this. In one sense, it doesn't matter. The Client had provded a requirement that the Cost Approach be completed and the Appraiser accepted the assignment. Therefore, the Appraiser was obligated to complete the Cost Approach. He/She could then choose to give it a lot, some, or no weight during final reconciliation.

 

[CANative]

Contractor margins tend to be more stable than developer margins, but both run higher when the market is hot and run a lot cooler when the markets run cold.

The thing to bear in mind about the cost format Fannie uses in the URAR is that it's a bit abbreviated and it aggregates costs that are broken out separately in other cost formats such as are used for narratives or the commercial forms or even the 71a/71b apartment forms. For example, outside of 1-4 appraising we normally break out the indirects and developer profit elements separately from the hard costs. Depending on the database we're using we also apply location multipliers or make adjustments to account for the current market conditions when compared to the last time the costs were updated.

It's not the 5-second process that many appraisers use.

SwiftEstimator (M&S) has a breakdown and can be customized. Once complete, my Bradford softward includes the break down as an exhibit and populates the Page 3 CA section. So, "it's in there."