When is use of the Cost Approach required?

The cost approach is required for mortgages under:
•      Section 247 Single Family Mortgage Insurance on Hawaiian Home Lands, Mortgagees are required to obtain only a Cost Approach Appraisal for both Existing and Proposed Construction, and
•     New Construction Manufactured Housing. 

The Appraiser must consider and attempt all approaches to value and must develop and reconcile each approach that is relevant. 

The Appraiser may use any of the credible and recognized methods to complete the cost approach (unit in place, segregated costs, price per unit, detailed builder’s cost method, or any other credible source that can be duplicated by the reader). If the Appraiser uses cost estimates provided by the contractor or builder of the property, the cost estimates must be reasonable and independently verified.  If the cost approach is applicable, the Appraiser must estimate the site value. Acceptable methodology used to estimate land value include sales comparison, allocation, and extraction.    The Appraiser must estimate the cost new for housing using either the replacement cost or the reproduction cost. 

For additional information see Handbook 4000.1 II.A.8.h.iv;  II.D.4.c.iii.(E)(1); II.D.5.l.  at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04053