Why are the cost from Marshall & Swift so low?

[Tim Hicks (Texas)]

Why are the costs in building-cost.net always too high?


Every appraiser should have to learn how to do a full cost approach with the Marshall & Swift 1007 form before they ever attempt to do an appraisal on their own. It would help them immensely in building their cost approaches and unlearn the fake cost approaches done by so many.

 

[Mztk1]

Every appraiser should have to learn how to do a full cost approach with the Marshall & Swift 1007 form before they ever attempt to do an appraisal on their own. It would help them immensely in building their cost approaches and unlearn the fake cost approaches done by so many.

I agree with that. One of the best courses I have taken was by the IFA on how to do a proper cost approach using the Marshall & Swift. That was when I appraised in one of the northeast states where everyone said the M&S does not work, but after I took the course I found out how incorrect they were. Now in Florida, I hear the same thing, but once again, from experience, I know the M&S does okay.

Also, when adjustments in the market are difficult to find, one can rely on the cost approach using a cost/depreciation analysis to estimate a market reaction to certain amenities (per the AI's Appraisal of Real Estate). Knowing how to do a good cost approach can be very important for supporting some of those adjustments.

 

[Elliott]

Sand states always have liked the CA. Probably why they've had the
biggest losses in market value.

 

[BigBear Seattle]

In my recent experience here in the Seattle area, the cost approach based on M&S is usually fairly close to or higher than the sales comparison. That is if I do a good job of matching the quality of the construction to the descriptions used in M&S instead of depending on the assessor's quality rating to select the M&S table.
However, during the boom times, I would have to go two tables higher to match the sales and cost approaches. The volume builders were getting VGood prices for Average quality homes. Of course the banks now own most of those homes.

 

[jimmyfrank]

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.

Ditto, George. Some appraisers are too lazy to take the time and effort to complete the cost approach correctely. If you have better cost data use it. In my area it is too high, so you must apply some degree of reasoning.