Why are the cost from Marshall & Swift so low?

[KenAZ]

EI = External inadequacy?

Oh great, another Cost Approach Thread . . . .

It is actually Economic Obsolesence. You can include it near the bottom of the Cost Approach on the 1004. The only way to figure it out is to calculate the cost and subtract the value from the Sales Comparison Approach.

I have more experience with the Cost Approach than 99.9% of appraisers, and I know it is garbage. As we learn in Appraiser 101, Cost does not equal value.

The real Cost Approach (Not M&S) is useful to help us predict the future value trend. If a new home costs $100 per sf to build, but current homes are selling for $50 per sf, then we know that at some point, the values will creep up to the costs. This does not mean that values are going up or down. Values could be declining, or stable, but eventually will go higher. No one knows when that will happen.

It could be tomorrow, it could be 10 years from now.

M&S is a good way to CYA, but it is not an accurate indicator of actual costs.

 

[John Hassler]

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

Also missing from M & S is carrying costs (or the value of loss of use of funds) while development takes place, and the EI related to the cost of the land itself - a $300,000 home on a $300,000 lot needs more net profit incentive to develop than a $300,000 home on a $50,000 lot.

 

[CANative]

EI = External inadequacy?

Entrepreneurial Incentive (versus Entrepreneurial Profit).

 

[David Mescon]

Also missing from M & S is carrying costs (or the value of loss of use of funds) while development takes place, and the EI related to the cost of the land itself - a $300,000 home on a $300,000 lot needs more net profit incentive to develop than a $300,000 home on a $50,000 lot.

Soft costs? How do ya even know you've got soft costs, huh???

 

[Riick]

Cost approach was considered but not used as it is inaccurate for anything other than recently built homes; In addition, in current marketplace, cost has little to do with market value.

 

[Terrel L. Shields]

M&S is about 80% low for areas along the Sonoma and Mendocino coasts.

permits and soft costs are high and builders just charge more because they can...people like to pay more than something is worth just to show off to their buddies...like owning a Rolex that breaks just as often as a timex and keeps no better time....but it is a Rolex.

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

great value added service to require of clients...why not? I don't want to do AMC work anyway.

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

External market conditions are extremely important to the value and basically arbitrages the gap between actual depreciated costs and sales... do it to the comps and see.

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

In many areas, particularly those with onerous regulation and zoning, the cost of permits, land prep, and the profit of the developer is huge. In rural areas where I live it is often virtually zero. In those areas, there are almost no "developer's profit" nor fees and the M & S costs can be fairly close without adjustment.

Entrepreneurial Incentive (versus Entrepreneurial Profit).

In the "sales is everything" positive economics viewpoint it is obvious a lot of the cost "schooling" was overlooked.

 

[CANative]

Terrell...

On the Mendo Coast there are only a small number of builders skilled, dependable labor is hard to come by and harder to keep on the job. Everything is a two or three hour drive to the developed communities and then a building site may be an hour from that. Costs are in the $300 to $400 per square foot range.

In the "sales is everything" positive economics viewpoint it is obvious a lot of the cost "schooling" was overlooked.

What's that supposed to mean? The two terms mean different things.

great value added service to require of clients...why not?

The cost approach on older houses in built out neighborhoods should be confined to the research necessary to support the rationale for the HBU opinion and then kept in the work file.

The cost approach is just as difficult as any other approach and in some cases it is more difficult. But it is not rocket surgery and I know it as well as any one else. Maybe better than some.

 

[Mike Boyd]

Building permit costs. In my market area, building permit and related fees can run as high as $45,000 for a typical home. Add water connection fees, sewer connection fees, sidewalks, curbs, gutters and driveway approaches. There may be a charge for a fireplug, also. Some electric companies charge for the service drop and ALL charge for the costs of underground service. Don't forget site prep costs. Also, when completing the cost approach if you're in a declining market, deduct for economic obsolesence. Improvment bonds might also be a factor.

 

[CANative]

Some electric companies charge for the service drop and ALL charge for the costs of underground service.

PG&E charges about $8,000 just to get the engineering paperwork done. Actual costs of installation are on top of that.

 

[DMZwerg]

Terrell...

On the Mendo Coast there are only a small number of builders skilled, dependable labor is hard to come by and harder to keep on the job. Everything is a two or three hour drive to the developed communities and then a building site may be an hour from that. Costs are in the $300 to $400 per square foot range.

Well, it would tend to make sense that one source is not going to be equally correct everywhere in the nation despite attempts at regional and local adjustments. Materials, labor, and so on all contribute and things can shift suddenly but take years to show up on the national radar.


So, why is M&S so low?
Well, it may just be where you are located, etc. If you have better sources then by all means use them.

The cost approach is just as difficult as any other approach and in some cases it is more difficult.

Yep.
I would also add that for some markets / uses it is simpler and more dependable than others. Just like income approach becomes more dependable as one moves away from the SFR markets that are often highly tied to other reasons to purchase rather than renting , then past 4 family into apartment buildings (where it is usually THE method), the cost approach likewise may not be universally as applicable or reliable.