Cost Approach Required for USDA Condo Appraisals

Dave Towne

Dave Towne

Certified Residential RE Appraiser at Towne Appraisals
AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003.
Dave Towne on e-AppraisersDirectory.com
Dave Towne

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Cost Approach Required for USDA Condo AppraisalsAppraisers,

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.

Otherwise, fuggetaboutit.”

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.

Dave Towne

Dave Towne

AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003. Dave Towne on e-AppraisersDirectory.com

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2 Responses

  1. Mike Ford Mike Ford says:

    No problem.
    1. ALL such reports will now be on the URAR (1004) form report.
    2. PRICE will range from $1,500 to $2,500 and require an advance inventory or breakdown of all common area; such as how many square feet of private roadway, sidewalks, sprinklered green belts, Number of trees and their type and sizes (5 gallon or 50 gallon size); SF of all common area living units including hallways; pools, spas, tennis courts, etc. PLUS the subject unit. Then obviously on townhouses we will be dealing with exterior rather than traditional interior (from the paint layer inward) dimensions, so a significant SF discrepancy is going to result from public records versus taped measurements.
    3. There will have to be a hypothetical condition and assumption of pro rata share of cost equaling the same percentage as the ownership portion.
    4. Since reliable data sources for the data required are not readily available it will obviously require anywhere from 2 to 4 weeks turn time.

    I am assuming that I a 400 unit development that they want 1/400th of the total underlying land value as the site value, right?

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  2. Baggins Baggins says:

    Day after day, more bad news for appraisers. If these companies ever hired an appraiser to complete all these related tasks which require appraisal specialty, that would be shocking. These industry persons hire every one but appraisers. And the typical lender position on condo vs 1004 form rests in their ability to close the deal, not on the accuracy of the reporting. Appraisers never know what to expect or how to define the scope of work, because the lender will alter that on a dime, to facilitate immediate closing without having to find a properly qualified buyer. / Per this specific issue, how can the appraiser reconcile the pre printed statements with these new requirements? They probably can’t. Set up to fail again, that’s the life of an appraiser.

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Cost Approach Required for USDA Condo Appraisals

by Dave Towne time to read: 2 min
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