Newz: DEI and Appraisers, New GSE Market Analysis Deadline Feb. 4
January 31, 2025
What’s in This Newsletter (In Order, Scroll Down)
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LIA AD: Weather Impact
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What is the Cost Approach to Real Estate Appraisal?
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‘Unparalleled’ 3-Mansion Compound on Miami’s Exclusive Palm Island Splashes Onto the Market for $150 Million
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DEI and Appraisers
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Fannie and Freddie Forecasts
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Fannie, Freddie: New Market Analysis Requirements February 4th
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Mortgage applications decreased 2.0 percent from one week earlier
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What is the Cost Approach to Real Estate Appraisal?
By Kevin Hecht
Excerpts: When to Use the Cost Approach
There are circumstances when it’s necessary to use the cost approach, for example, unique properties and new construction. The cost approach can also be used to support the sales comparison approach.
Fannie Mae only accepts the sales comparison approach as its primary valuation tool. However, that does not preclude an appraiser from also using the cost approach to substantiate their findings. And there are other lenders who may accept the cost approach over other real estate appraisal methods for certain properties or situations…
Some Disadvantages of Using the Cost Approach
There are inherent benefits of using the cost approach, especially when you’re tasked with challenging properties that have little or no comps. But there are also some downsides.
One of the primary disadvantages is the assumption that land is available for purchase to build an identical property. Land is a scarce resource. When comparable land sales are not available, the value must be estimated.
The bigger issue here is undervaluing the land costs based on scarcity. In real estate, location is everything. A small ocean-front cottage has its value because of the land it sits on, not necessarily its four walls…
Other disadvantages include how to depreciate an older property or find costs for similar building materials. This can be particularly tricky when using the reproduction method of the cost approach or appraising a historic home.
Appraisers should consider whether the cost approach is the best tool to use. In many situations, it’s best used in tandem with the sales comparison approach.
Tips for Using the Cost Approach
As part of our monthly survey series, we asked our community of real estate appraisers, “What’s your best tip for using the cost approach to appraise?” They shared many helpful comments, including common pitfalls to avoid as well as general advice and recommendations. Here’s what they said:
“Use and research valuable comps and educate yourself on the surrounding market.”
“Call local developers for better support on cost estimates. Make friends with builders.”…
To read more, Click Here
My comments: When I saw the article topic I thought it would be boring. Not! When I read it I realized it was one of the best on the Cost Approach I have read! If you only do GSE appraisals, you probably don’t use the Cost Approach very often, except for new construction. This article explains when and why. It also includes “basic” info such as reproduction vs. replacement. Keep it as a reference for the future when you may need to use the Cost Approach.
When I first started appraising in a Northern CA assessor’s office in 1975, the Cost Approach was the only approached used for decades for all properties. My supervisor devised a table based on square footage for homes which we used.
In the Oakland CA firestorm in 2021, many of the homes had reproduction replacement in their insurance policies. Many were historic homes with features that were very difficult to reproduce, assuming you could find anyone who still knew how to build them. The home owners with reproduction costs got very large payments from their insurance companies. Many had larger homes built with sometimes very unusual designs. The insurance companies learned their mistake and never offered reproduction again.
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3-Mansion Compound on Miami’s Exclusive Palm Island Splashes Onto the Market for $150 Million
Excerpts: 3 homes, 92,00 sq.ft. 300 linear ft. of water frontage
The pricey property, which initially debuted in 2023, was relisted in 2024 at the same price. Now, with Florida’s luxury housing market experiencing a major boom, the compound is back on the market with the same sky-high price.
“Potential buyers might include high-profile individuals like celebrities or CEOs, investors, entertainers or hosts, or luxury lifestyle seekers,” he tells Realtor.com®.
“This offering appeals to those who prioritize exclusivity and are willing to invest significantly for a unique, turnkey luxury compound.”
The trio of homes was assembled by owner Jorge Luise Garcia and the Adria, Maria, Adrian Almeida Trust. They were purchased separately over a period of 17 years.
The first of the three mansions was purchased in 2004 for $3.45 million, the second in 2019 for $13.9 million, and the third in 2021 for $17 million, for a total of $34.35 million, according to property records.
To read more, Click Here
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