COST VS VALUE VS PROFIT FOR BUILDING OR RETROFITTING

COST, as affected by real property (land & structures): Cost of land and assembling a structure as an improvement to the land. The cost of the structure is the purchase of land, planning, estimating, managing, labor and profit of the materials assembled or installed for the production of a building on improving the site. Cost is materials or unit value and the business/investment process of completing the structure or improvement on site for a profit.

Most structures are designed for a specific purpose and the location and zoning determine the requirements set by local government building codes and standards for determining if the design and purpose will fit that location. If a buildings design and purpose have contributed fully to the site value then the building is considered to have it's Highest and Best Use on that site.  In some cases zoning variances can be obtained but in most urban/suburban locations there are set zoning standards for residential. Developer restrictions which convert to Home Owners Association restrictions, when subdivisions are a certain percentage completed, further deem adherence to conformity.

These types of restrictions help developers by maintaining a balance in estimating cost/profit and home owners value through conformity. Alternatively, there are custom homes and buildings that hold their own value but also must have some conformity to "highest & best use" or cost will out weigh value. The occasional residential building that has no comparison in the market is usually owner financed or has other non-conforming financing, i.e., such as the "Biltmore House".

Cost as defined by typical design and purpose has only to meet local zoning and builidiing code. If the "Highest and Best Use" of a site by local code is to have a 1,500 sq.ft. single family residential dwelling on it then it only has to be constructed by materials and units of the minimum code. If code only requires certain components or units efficiencies or outputs in the building then the builder is going to be cost concious as possible to maintain a profit margin. That cost consciousness built into a neighborhood for selling at a profit then sets the value of the market area. The exception is a custom home built to a "cost plus profit" agreement with the builder. Remember Cost = fees, materials, labor, and profit.

In remodeling, renovating or retrofitting a building a cost plus profit margin must be maintained while offering a customer a reasonable return on his investment or it is not feasible. Like any investment the value must have a definition either in present value, value in use or future value. Remember market value is determined by specicific date which can be either present or future value. Value In Use is usually determined by an income stream but may also be indentified by a other important issues of the owner such as comfort or health issues. These inanimate issues are constantly conditional and are much harder to define or derive a value from the time specific market reaction.

The building code in climate zone three may only be a 13 SEER heat pump and R-30 insulation and is a builders or replacement base cost and anything over that is custom level costs. Higher level energy efficiency cost has to be justified by the difference in base cost to custom cost. The whole value of the 15 or 16 SEER unit replacement cannot be figured into the return on investment only the difference in cost has to be adjusted because you still need HVAC regardless of the extra cost. For instance you can't have big holes in the walls for light to come in, you have to have windows but you don't need triple pane argon gas filled LoE glass. Take the difference and see if it is justified by either the market value (if you need an appraisal) or the value in use if the owner needs or requires it, depending of course how it is being paid for. You still need to make a profit just as you were only replacing like same units but your profit should be increased only by the additional unit cost and complexity of the job.

Economic conditions and the availability and cost of money are alway factors in making financial decisions. Finding out what is important to your customer or enlightening your customer to what is important to them and selling that is what is difficult about any business. Not everyone that does the work is as good at selling the product. Someone that understands the product and can understand the customer can help them buy. If you use the typical home improvement high pressure sales tecniques in this field it will further hurt the energy efficient business, however that is already happening; get out there and educate the public.

VALUE: From the perspective of the appraiser as the scope of work for the market value. The appraisers statement on reconciliation is "Based on a complete visual inspection of the interior and exterior (not the entire crawl space & attic and not model numbers and serial numbers but a visual inspection by access through normal course of businsess to acertain the overall condition, i.e., appraisers are not home inspectors) areas of the subject property, defined scope of work, statement of assuumptions an limiting conditions, and appraisers certification, our opinion of the market value as defined, of the real property that is the subject of this report is ***** as of  ****, which is the date of the inspection and the effective date of this appraisal.

Definition of Scope of Work: The scope of work for this appraisal is defined by the complexity of this appraisal assignment (based on the definition of market value and mortgage guidelines) and the reporting requirements of the appraisal form including the following definition of market value.

Definition of Market Value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicite in this definition is the consumation of a sales as of a specified date and the passing of title from seller to buyer under conditions whereby: 1) buyer and seller are typically motivated; 2) both parties are well informed or well advised, and each acting in what he or she considers hi or her own best interest.; 3) a reasonable time is allowed for exposure in the open market; 4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and 5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

When I take the basis of my home and add the improvements I've made to it, not just the replacement cost, I expect to make a profit on it. When I decide on a home improvement such as an addition or solar panels I need to research the return on my investment as well as the profit. Part of my return & profit from the solar panels will be "value in use" in energy savings and possibly the durablility of the heating & cooling system. If I sell the home at the end of the life expectancy of the solar panels then I may not make a profit on them because they are short lived improvements where the sunroom if maintained should last the economic life of the building up to 70 years. A home with a mortgage must always maintain a minimum economic life of the loan (the house will if maintained last for a 30 year mtg) where the improvements are contributing value to the land for a value that will produce at least a break even value at the end of the loan.

 YOU CAN'T SELL A WIDGET THAT COST $2 FOR $1 AND MAKE A PROFIT. COST HAS TO BE JUSTIFIED BY VALUE BEFORE THE WIDGET IS IMPLEMENTED OR THERE IS NO PROFIT.

 

Views: 198

Tags: APPRAISAL, COST, EFFICIENCY, ENERGY, VALUE

Comment

You need to be a member of Home Energy Pros to add comments!

Join Home Energy Pros

Home Energy Pros

Home Energy Pros was founded by the developers of Home Energy Saver Pro (sponsored by the U.S. Department of Energy,) and brought to you in partnership with Home Energy magazine.

Latest Activity

Christopher Morin's blog post was featured

5 Things New Energy Efficiency HVAC Contractors Need to Know

1. Do not sell on Price! Use 'Simple Payback'The price of High-efficient equipment will undoubtedly…See More
9 hours ago
Jim Gunshinan's blog post was featured
9 hours ago
Profile IconDan Liska and Rob Moreno joined Home Energy Pros
9 hours ago
Jim Gunshinan posted a blog post
12 hours ago
Kim Tanner commented on Diane Chojnowski's group Home Energy Pros on Twitter
"Follow The Energy Conservatory on Twitter! We'll follow…"
14 hours ago
Kim Tanner joined Diane Chojnowski's group
Thumbnail

Home Energy Pros on Twitter

We've created a twitter list of members of Home Energy Pros who tweet!See More
14 hours ago
Bud Poll replied to Kaushal Bharath Raju's discussion Affordability & Deep Energy Upgrade/Passive House Retrofit in Berkeley, California.
"Hi Kaushal, First step is to understand where you are in terms of energy costs.  If current…"
17 hours ago
Kaushal Bharath Raju posted a discussion

Affordability & Deep Energy Upgrade/Passive House Retrofit in Berkeley, California.

We have a small 1940s single level house (1005sqf) in Berkeley, California that is in need of a…See More
yesterday
Christopher Morin posted a blog post

5 Things New Energy Efficiency HVAC Contractors Need to Know

1. Do not sell on Price! Use 'Simple Payback'The price of High-efficient equipment will undoubtedly…See More
yesterday
David Eggleton commented on David Eggleton's group Considering Permaculture &/or Transition
"In August 2014, in Minnesota, there's another unprecedented opportunity to meet and mix with a…"
yesterday
Glen Gallo commented on Jim Gunshinan's blog post Energy Upgrade California—Up Close and Personal
"Nate, RE: Duct test On my own home and a rental I have tested more than once over the last many…"
yesterday
Profile Iconangela hines and Charles Goldman joined Home Energy Pros
yesterday

© 2014   Created by Lawrence Berkeley National Laboratory.

Badges  |  Report an Issue  |  Terms of Service