Why are the cost from Marshall & Swift so low?

[George Hatch]

The first thing to recognize is that the "cost" number in the cost approach section of the Fannie forms is an aggregate number that includes all costs and profit/loss margins, whereas the base costs in M&S reflect fewer items. You have to add a lot of items to those base costs just to reflect the items most homes have, like flooring and kitchen appliances and fireplaces. That's not to mention the size and shape multipliers.

M&S also notoriously undercounts local indirect costs like fees and permit costs for some of the metro areas. The last I heard, local fees and permits in my region average about $40,000 per unit whereas M&S uses a national average that is less than $10,000. M&S also uses an arbitrary developer profit margin of something like 12% - that works a whole lot better in some areas than others, and it works a lot differently depending on when during an economic cycle you're hitting it. When times are good the typical developer profit margin is a LOT more than 12%, whereas during bad times it can drop below zero to represent a net loss to the developer.

You can complain about M&S not doing your job for you all you want, or you can recognize what their limitations are and proceed from there. It's just like any other source of data out there - none of them are perfect.

 

[CANative]

That seems like too much work and research for appraisers doing AMC appraisals for a buck and a half each.

 

[George Ellerman]

I've generally found the cost approach to be largely meaningless due to varying regional cost factors that M/S can't possibly factor for in today's volatile economic climates. Your local "Joe the Contactor" is going to beat M/S in 90% of the cases in determining actual cost. Also,IMO, if the house is over 5-10 years old the problems with determining depreciation make any cost approach highly suspect.

 

[SunbeltAppraisals]

For appraisers who use the cost approach, do you include economic instabitlity as external depreciation?

 

[CANative]

For appraisers who use the cost approach, do you include economic instabitlity as external depreciation?

If it effects the housing market, then yes. BTW... it's external (or economic) obsolesence (which results in depreciation).

 

[Tim Hicks (Texas)]

The Marshall & Swift is dead on this area...sorry!

Like George said, you need to develop a full cost approach. I wonder what percentage of appraisers actually know how to do a Marshall & Swift 1007 cost form? Also, here is TX the EI, EP and general BS from builders is not as ridiculous as it is in some areas. We are the land of cheap real estate.

 

[CANative]

Your area is stable and development risk is low so EP and EI is so low it gets absorbed and hidden in the market noise and margins of error in doing cost approaches.

Including EI as a line item of cost is not "necessary" but it is more technically correct to do so.

 

[SunbeltAppraisals]

EI = External inadequacy?

 

[David Mescon]

Costs are very local and M&S local modifiers are not. Costs can changed from day to day or week to week. Costs do no include entrepreneurial incentive and how EI is added depends on the builders point of view. If the builder is also the developer then then the M&S costs are going to look low because they are including it in their costs and M&S isn't.

Ditto that.

 

[David Mescon]

The first thing to recognize is that the "cost" number in the cost approach section of the Fannie forms is an aggregate number that includes all costs and profit/loss margins, whereas the base costs in M&S reflect fewer items. You have to add a lot of items to those base costs just to reflect the items most homes have, like flooring and kitchen appliances and fireplaces. That's not to mention the size and shape multipliers.

M&S also notoriously undercounts local indirect costs like fees and permit costs for some of the metro areas. The last I heard, local fees and permits in my region average about $40,000 per unit whereas M&S uses a national average that is less than $10,000. M&S also uses an arbitrary developer profit margin of something like 12% - that works a whole lot better in some areas than others, and it works a lot differently depending on when during an economic cycle you're hitting it. When times are good the typical developer profit margin is a LOT more than 12%, whereas during bad times it can drop below zero to represent a net loss to the developer.

You can complain about M&S not doing your job for you all you want, or you can recognize what their limitations are and proceed from there. It's just like any other source of data out there - none of them are perfect.

See above. M&S includes contractor's profit but not developer's profit.