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Using The Cost Books

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Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
I know a lot of appraisers dismiss the cost approach in every form or fashion and don’t even own a cost book. The cost book to me is an essential item in ones arsenal of appraisal. It serves more than to give an estimate of cost for the CA, rather it is a way to estimate depreciation in the absence of other methods. It is the basis to estimate depreciated costs for making adjustments, especially to things like outbuildings, horse stalls, etc.

I know again, from posts in AF that there are a lot of appraisers who argue that even then the book cannot judge the obsolescence that may occur when the market discounts an over-improvement. True to a point. But if you lack enough paired sales to cover all the potential variations in design, construction and COST, then you are left guessing such obsolescence anyway.

Further, the text books are very clear. ADJUSTMENTS can be made by a number of ways, both qualitative and quantitative. And listed among those techniques are “depreciated cost” and “cost to cure”. So go back to the textbooks before dismissing these methods. They are “recognized” methods by USPAP.

The paired sales method is no more accurate than the other methods when you lack sufficient numbers of paired sales to affirm a reasonable adjustment. A single “pairing” between outlier sales can mislead as easily as not. And who hasn’t done a paired analysis where the range of value of say a fireplace is +10,000 to -5,000?

I got my new 2017 National Building Cost Manual and thumbing through the book (in addition to downloading the software) gives another insight that is useful. Namely, another thread discusses outbuildings and the difficulty in assigning a contributory value to same. Have you seen reports where the appraiser dismisses a significantly large, newer shop as no contribution? Or among comps are a small pole shed with dirt floor that is not adjusted any differently from a nice shop building with a steel frame on a concrete foundation? Something is wrong with that picture.

Among the items in the book (not on the computer version) is a Historical price index. If you appraise a property with a shop building and the owner can tell you what the building cost new (ask!) and when he built it, then you can calculate the RCN using the multiplier in the Historical index (page 9 of NBC). So, if the shop was built in 2004, cost $15,000 then, we can go to the index and it is about 1.5 under “agricultural buildings”…So the current RCN is $22,500. You can affirm the reasonableness of such an estimate by going ahead and using the book, OR, extracting from a sale, pairing sales of similar buildings (usually to a per SF pricing), etc. You are not married to a single technique, no more than you should marry yourself to a single paired sale. Each would be fraught with potential for wide disparity. You can go to the life expectancy chart in books and using straightline depreciation to estimate a discount due to wear and tear. Also, cost books have charts to calculate the depreciation. These are based on generalized data, but in the absence of other methods, the depreciation is based on market data gathered by the editors of the cost book(s). So learn to use the book…actually read the information provided.

Some will say, but cost to cure and DCN does not address a functional discount for being an over-improvement. OK. Agree, but so? Can you actually calculate that discount accurately when you have few comparables to do paired sales? Nope. Same problem, regardless how you address it.

The fact is that we cannot quantify everything with any degree of precision. It is all estimates. In depreciation, I can estimate the observed effective age. That is my judgment. Or, I can calculate it by using comparables and extracting a contributory value, but even there it is my judgment.

In the cost approach there are typically 10% or more difference between quality levels. Is that any different from say, Q1. Q2? Or condition C1, C2? There are pretty wide differences. We make these judgments that are basically 10± % value differences yet seem dismissive of cost-related methods that produce a number with a margin of error no more, perhaps even less, than we accept as routine in pairing sales, analyzing condition and quality in a home?

Yes, there can be a difference in the cost to cure and the actual sales price. But is that due to a discount for having to do the work? Or, people selling defective houses are in a bind to sell and cannot fix it up, a huge part of why they are selling (distressed?) Can we know? Will we be told? The difference between the cost to cure added to the as is value and the actual sales price plus the actual repairs made can vary widely. And I suggest few appraisers are “good enough” to consistently reconcile those two numbers before the fact using either paired sales or cost books. It is an estimate, and not a particularly good one. That is the nature of the beast. We are not engineers, builders, nor can we see the future. Anyone who has got estimates from builders knows that estimates will often vary by 40% or more. We just got bids on a roof for an old community building here and it ranged from $4,800 to $8,000 for a 1,800 SF building.

The summary is that we are oft presented with problems that have no finite solution. We have to support our conclusions. That does not mean we have to be highly accurate. So when confronted with an outbuilding and doing an arm-wave estimate of $10,000 without any support, why not apply a depreciated cost new estimate? The NBC books are less than $100. And they allow you to vet the building on the basis of its construction and age. Costs for outbuildings vary widely and you have to know the building construction (insulated or not; steel frame or wood, pole; concrete or dirt; electricity, plumbing, etc.) But, whether facing a reviewer, the board or an investigator, if you can replicate your calculation in support of an adjustment, then I believe you have met the test of USPAP, whether or not the estimate ultimately proves to be consistent with the sale price in the future.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
Let me begin by saying that I think the abandonment of the cost approach by most residential appraisers has not been in the best interest of our profession. Many have no clue of actual site values, and I think that is largely due to the fact that they don't have to have a site value for a cost approach.

As for published cost books, I both love them and hate them. They are full of good information, but they often lack the specificity needed for good application in the appraisal process. The biggest weakness , IMO, is in the local multipliers - they just aren't local enough for the published cost services to work well in my area. Most, for example, have one multiplier for the entire Nashville market, when, in fact, costs vary greatly across the region. I had to develop my own truly local multipliers in order to get meaningful results form any big cost service.
 

jay trotta

Elite Member
Joined
Feb 8, 2004
Professional Status
Certified Residential Appraiser
State
Connecticut
Let me begin by saying that I think the abandonment of the cost approach by most residential appraisers has not been in the best interest of our profession. Many have no clue of actual site values, and I think that is largely due to the fact that they don't have to have a site value for a cost approach.

As for published cost books, I both love them and hate them. They are full of good information, but they often lack the specificity needed for good application in the appraisal process. The biggest weakness , IMO, is in the local multipliers - they just aren't local enough for the published cost services to work well in my area. Most, for example, have one multiplier for the entire Nashville market, when, in fact, costs vary greatly across the region. I had to develop my own truly local multipliers in order to get meaningful results form any big cost service.

Agreed, but - since the great recession, we have lost numerous builders across the country who provide the development side of the business. Some area's have come back and others have not. When there was ample New Construction in my area, you could pull sub-division information and derive input to develop the CA; over the past few years development here is minimal at best and scattered (individual lots) much more difficult to develop Land Values.
To add to this dilemma, new sub-divisions are a rare find and costs have accelerated beyond past History; adding to this the Costs for Goods currently, one would be hard pressed for 10 year old data of any similarity. Pre - 2007 it was fairly easy to assemble data sufficient enough to provide a CA, today, I would deem it a high risk in our area.
The cost book I used last was produced by Stanley (originally developed here, but I believe a CA corp now) was what I considered closest to reflecting our costs here. Then again, when there were ample builders you could get actual or nearly actual costs from them, which makes the entire process more realistic. I use to have several connections for; sub division input / road building input / engineering etc., who have ventured off to other avenues for income.
IMO it will take another 20 years before we have enough new developments to get back into that process and I doubt I will be around when that happens.
PS: Most Lenders/AMC want a minimal site value estimate, when the CA is not completed; PFA appears to be their highlight no matter the market, as without development and individual data it maybe the only solution for some.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
Let me begin by saying that I think the abandonment of the cost approach by most residential appraisers has not been in the best interest of our profession. Many have no clue of actual site values, and I think that is largely due to the fact that they don't have to have a site value for a cost approach.

As for published cost books, I both love them and hate them. They are full of good information, but they often lack the specificity needed for good application in the appraisal process. The biggest weakness , IMO, is in the local multipliers - they just aren't local enough for the published cost services to work well in my area. Most, for example, have one multiplier for the entire Nashville market, when, in fact, costs vary greatly across the region. I had to develop my own truly local multipliers in order to get meaningful results form any big cost service.

I'm just curious,
I've never been to Nashville,
so can I ask,
what parts of the costs (other than land, permits and inspections) vary between different parts of Nashville?

We have a finished` lumber staging area going on and off of trains here.
But new homes are not receiving any discount for being closer to this source of lumber, than homes farther away. Wages across 2 counties don't vary enough to be any significant impact on labor costs, and, there are some "imported" workers so regional labor differences don't seem to be an issue.

Because my market varies little in costs of many miles, I'm wondering why a city area would vary for reasons other than local permits, which should be separately addressed, for every cost calculation, as those permit costs changes do not necessarily coincide with cost index updates.

.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
what parts of the costs (other than land, permits and inspections) vary between different parts of Nashville?.

Basically, all of them :) And the differences are not small.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
Basically, all of them :) And the differences are not small.

Right, but the cost indexes don't deal with land value differences.
Local costs of regulations, permits and inspections changes without notice to the cost indexes and should be included separately by each appraiser, as they are not part of the index soft costs.
but a 2x4 should be about the same price, wholesale, without sales tax, across a wider regional area than just portions of a city.

.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
Right, but the cost indexes don't deal with land value differences.
And??? I am not and was not talking about land values. I am talking about constructions costs. :)
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
And??? I am not and was not talking about land values. I am talking about constructions costs. :)

Right,

so a 2 x 4 should cost the same on one end of town as it does on the other.
The carpenter's labor should cost the same on one end of town as it does on the other.

.
They are full of good information, but they often lack the specificity needed for good application in the appraisal process. The biggest weakness , IMO, is in the local multipliers - they just aren't local enough for the published cost services to work well in my area. Most, for example, have one multiplier for the entire Nashville market, when, in fact, costs vary greatly across the region. I had to develop my own truly local multipliers in order to get meaningful results form any big cost service.

Soft costs for permits are not part of the multipliers.

.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
Soft costs for permits are not part of the multipliers.
.
And??? I never said that they were or should be.


I have not expressed any view on what costs "should" be, I have simply shared an observation about what costs actually are, in my market. If costs are very uniform in your area, then the cost services may work well in your area. They do not work well in my market because of the cost variability.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
Right,
That's why I was asking you about your area and why those costs vary.

I don't know your area, so I was looking for some insight into why that is that costs vary, when not including those local permitting and land costs, which aren't included in multipliers anyway.

What is it that is causing these cost variances, in your estimation?

..
 
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