Fannie Mae and the Cost Approach
Excerpt: We often receive questions from appraisers regarding Fannie Mae and the cost approach. For example: “I’m appraising a property and have been instructed to comply with Fannie Mae guidelines. I understand that Fannie Mae requires the sales comparison approach, but what if there aren’t enough good comps? Can I use the cost approach as the primary method of valuation?”
Answer: No!
In order to comply with Fannie Mae guidelines, the sales comparison approach must be the primary method used to determine the value. In fact, Fannie Mae will not purchase a mortgage on a property if the cost approach is the primary or only method of valuation used.
Quite simply, if there isn’t enough data for the appraiser to develop a reliable opinion of value by the sales comparison approach, the mortgage will not be marketable to Fannie Mae.
However…
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My comment: I included this article plus the one below, which both address the Cost Approach’s common appraisal questions.
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The Cost Approach: An Underutilized Approach to Value
Excerpt: In residential appraising, the cost approach and the income approach have in many cases become less utilized in favor of sole reliance on the sales comparison approach.
There are occasions when the income approach can be the primary indicator of value for residential properties, such as developments with a high percentage of homes owned by investors.
The fact that Fannie Mae won’t accept reports that rely solely on the cost approach, with a few rare exceptions, doesn’t mean that approach can’t be the primary indicator of value. It just means Fannie Mae won’t buy that loan.
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My comments: I started with an assessor’s office in the 1970s. At that time, my county was changing from only using the Cost Approach for decades to a sales-based approach. I never liked to use only the Cost Approach when I started doing fee appraisals.
In my area, there are very few land sales. There has not been one for over 20 years in my city. Depreciation is always iffy when appraising Victorian homes built before 1915.
But, I always use the Cost Approach for new construction to determine the financial feasibility of custom homes. I use a few land sales from other cities. If the new proposed home is on a vacant parcel, I go back to when the parcel was purchased, sometimes many years ago, and do a market condition adjustment.
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So Many Appraisal Cost Approach Questions
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