Cost Approach Required for USDA Condo Appraisals
New written instructions published by USDA ‘require’ a COST APPROACH for the condo being appraised.
Interestingly, the pre-printed 1073 Form has NO PLACE on it to complete a Cost Approach – for good reason! While not impossible, it would be extraordinarily difficult to calculate a CA for a typical condo in a multi-unit building, without supporting documentation and a gigantic pile of cost info for the various components.
And in fact, appraiser’s certification #4 on the 1073 form says that neither a Cost Approach nor an Income Approach are included unless the appraiser considers them necessary to arrive at a credible value conclusion. There is a place on the 1073 form for an Income Approach to be reported, because often condos are rented to the borrower’s unrelated clients. Makes me really wonder if the person or people who wrote this new USDA manual totally understand the difficulty of doing a proper CA for a typical condo assignment.
A skilled and experienced Southern California appraiser I’m pen-pals with, who I won’t directly name here, had this to say about this new ‘requirement’ on one of the forums I read:
“Because the condominium form of ownership does not have either right or title to the building but only the airspace described by the building interior, the cost approach cannot be applied as airspace does not depreciate, only the structure that defines it.
The cost approach would require the entire project to be analyzed with a cost estimate.
I am certain that the building insurance underwriter has already done that. Now, if the insurance underwriter’s information was made available to the appraiser so the Subject’s interest in the project could be measured as a fraction of the insurance company’s cost analysis, then we might have a basis for completing the cost approach for a condominium.
On the other hand, a “Site Condo” – a borrower owned single family home on its own owned site in a subdivision, where the only part of the legal description saying ‘condo’ applies to an HOA collecting dues for off-site common areas within the subdivision – could be done with a CA included, because that property functions as a typical stand-alone SFR.
SFR “Site Condos” are not well understood by typical mortgage underwriters, and even by many appraisers. Even FHA does not ‘get it’ because they require the SFR “Site Condo” to be reported on a 1073 Form which is not really designed for this kind of property.
People get their skivvies in a bunch and have a knee-jerk reaction when they see the word ‘condo’ in a legal description, without fully analyzing the property ownership, its use, and the collection and application of the HOA dues.