Ch 5 Flashcards
A new 1,500 square foot house may have cost $310,000 new, and this cost included a concrete driveway that cost $10,000. What is the cost to construct the home per square foot?
Subtracting $10,000 from $310,000 would indicate that the cost of the house was $300,000. Dividing $300,000 by 1,500 square feet indicates that the cost to construct the home was $200 per square foot.
Direct costs include:
= building and materials
= hard costs = tangible
Building permits
Materials used to construct buildings
Labor used to construct buildings
Equipment used in construction
Security during construction
Contractor’s shack and temporary fencing
Material storage facilities
Installation of power line
Contractor’s overhead and profit
Worker’s compensation, fire and liability insurance
Indirect costs include:
= anything else besides labor and material
= soft cost = intangible
Architectural and engineering fees
Appraisal, accounting and legal fees
Cost of carrying the investment - points, service charges and interest on construction loans
Insurance and taxes during construction
Marketing, sales and lease-up costs and commissions
Administrative expenses of the developer
Costs of title changes
Cost of carrying the investment after construction until stabilized occupancy is achieved
There are three primary cost estimating methods:
Comparative unit method
Unit-in-place method
Quantity survey method
However, there is a fourth, rather simplistic method that I want to mention first. It is only useful in certain situations. It is the cost index method.
The contract cost for constructing a house in January 1996 was $324,500.
The index for January 1996 was 212.6 and the current index is 306.4.
What is the current cost estimate?
The contract cost for constructing a house in January 1996 was $324,500.
The index for January 1996 was 212.6 and the current index is 306.4.
306.4 divided by 212.6 = 1.441. This means the costs have increased 44.1%. For the sake of consistency, let’s round to two decimal places, and use 1.44.
$324,500 X 1.44 = $467,280
A house contains 2,826 square feet. It was constructed in 1995 at a cost of $54.18 per SF.
The cost index at that time was 193.4.
The cost index today is 286.3.
What is the estimated cost to build the building today?
2,826 SF X $54.18 = $153,113
286.3 / 193.4 = 1.480352 (round to 1.48)
$153,113 x 1.48 = $226,607
Therefore, costs have gone up 48% since 1995 and it would cost $226,607 to build the same house today.
Comparative unit method:
A method used to derive a cost estimate in terms of dollars per unit of area or volume based on known costs of similar structures that are adjusted for time and physical differences; usually applied to total building area.
It is the simplest, quickest, least complicated and (some say) least accurate method of estimating costs. It is the one that is used primarily by residential appraisers. Costs are expressed in terms of dollars per unit of area or volume.
Comparative Unit Method Steps:
Select sales of recently constructed buildings that are similar to the subject property and represent the highest and best use of the site
Subtract the value of the site and site improvements from the sales price to arrive at the cost new of the improvements (including entrepreneurial incentive)
Make adjustments for physical differences between the subject and the sale properties
Divide the adjusted cost new by the desired unit of area or volume to arrive at the cost per unit
Adjust the unit cost for market conditions, if necessary
Apply the unit costs to the subject property
You find a comparable sale of a new house similar to the one you are appraising.
It just sold for $320,000. You estimate the value of the site at $75,000 and the cost of the site improvements at $15,000.
The house has 2,550 square feet of gross living area.
Your research shows the subject land is worth $65,000 and you project the site improvements will cost $12,000. When completed it will be brand new with no depreciation.
What is the value according to the cost approach?
Comparative Unit Method
$320,000 - $75,000 -$15,000 = $230,000 improvement cost new
$230,000
/2,550 SF
= $90.20/SF
2,475 SF
x $90.20
= $223,245
$223,245 building new
+$65,000 site
+ $12,000 site improvements
= $300,245
Cost estimates to be used in the cost approach include three basic ingredients:
- Direct costs
- Indirect costs
- Entrepreneurial incentive
Entrepreneurial incentive is what a contractor or developer x to get; entrepreneurial profit is what they x get.
hopes
actually
Most cost estimating services include typical builder’s profit in their cost estimates, but not x
entrepreneurial profit.
Interpolation is when a number is xxx
estimated between two known numbers.
Marshall & Swift may state that a 2,400 square foot home costs $90.00 per square foot, and a 2,500 square foot costs $85.00 per square foot. (Larger homes typically cost less per square foot to build.)
But what if your subject home is 2,425 square feet?
Interpol:
It would cost less than a 2,400 square foot home, but more than a 2,500 square foot home. We can interpolate between these known costs.
If a 2,400 square foot home costs $90.00 per SF, and a 2,500 SF home costs $85.00 per SF, we can add the costs together ($90 + $85) and divide by 2 to get the midpoint between the two costs ($87.50). This would be the interpolated cost per SF of a 2,450 SF home, because 2,450 is the midpoint between 2,400 and 2,500.
Now, we can interpolate between the costs of a 2,400 SF home ($90.00) and a 2,450 SF home ($87.50) and get the cost of a 2,425 SF home ($90.00 + $87.50 = $177.50 / 2 = $88.75). So $88.75 would be the interpolated cost new of a 2,425 SF home, based on the above cost figures.
