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Using Cost Approach For Final Valuation

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robert hoagland

Freshman Member
Joined
Jan 27, 2003
Professional Status
Certified Residential Appraiser
State
Connecticut
Looking for some comments to get my point across. Doing an appraisal on new construction which, after a careful and precise site valuation, plus speaking with the builder and architect, my cost approach comes in at around 10 mil. The perfectly good 40 year old colonial/subject property was purchased this year for 4.75 mil. and is being demolished (don't ask, its the thing to do around here)! Plenty of comparable sales (size, age, acreage, amenities) in this area the past two years in the 5-7 mil. range but nothing (except waterfront properties) as high as what my cost approach analysis says. I have made some adjustments for quality (finding out what some of these sales have inside is a huge obstacle!) and condition (two sales are 8 years old), but my numbers still have a 1-2 mil. difference. Also, I am using some comparable listed properties as backup for my value. My gut feeling is to put the most wieght on the cost approach to come up with the final value, but I am having trouble intelligently getting that point across in my addenda. Any advice would help. (sorry for all the parenthesis used)
 

Walter Kirk

Senior Member
Joined
Jun 24, 2003
Professional Status
Licensed Appraiser
State
New Jersey
Stop! Don't make the mistake of depending on the cost approach. If there is no market for 10 million dollar houses in the area no house is worth 10 million dollars no matter what it cost to build.

Your adjusted comparables are telling you the truth, the subject will probably be worth around 8 million.
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
Robert: I second Walter's post about danger... :blink:

The habit of folk in the upper money end of things to build monuments to ego in the hands of architects without the client base or guts to tell them NO is unquestionable.

The habit of Banks to desire the business of those same fools is equally unquestionable.

The habit of banks to body slam appraisers who agree to this foolishness is going to become more and more common.

Check your final reconciliation and definition of market value... It is WORTH what it can be sold for, not what it costs to build and cost to build is NOT the answer to the cost approach: which must also include any depreciation as EXTRACTED from the MARKET. market market market regardless of what the realtors know about location. We be appraisers!

There is an 'architecturally interesting' property of some 5500 Square feet in my town. Cost approach would undoubtedly be in excess of the 1/2 mil mark. After 5 years of exposure the last listing was for $375,000 if I remember correctly. Point being cost ain''t market.

Sez me
Best thing this country could do is set a cap on residential loan tax writeoff, to prevent monstrosities funded by banks and written off at the taxpayers expense from being built.
 

wyecoyote

Senior Member
Joined
Jan 15, 2002
Professional Status
Gvmt Agency, FNMA, HUD, VA etc.
State
Washington
Robert,

Cost does not directly equate to value. Suppose it cost 10 million to build. Including the original cost of buying the 4.75 Million colonial. Then the demolition costs and the construction costs. This does not equate to the market value of the house. Had one similar where an individual bought a house in an area spent 1 million to buy then demolished to 20 year old structure to build a new structure total cost was 3 million value was only 1.5 million. Just because they are not spending that much does not mean it is worth it. Consider what the market is bearing out for the house. You state that sales are in the 5-7 Million range and only water front properties are selling for the amount of cost that the subject is. Unless your subject is far far superior to any sales. Also have to consider the waterfront properties. What is currently on the market as well. But I for one would not put any weight on the cost approach other than supporting value to the sales comparison approach.
 
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