Ch 4 Flashcards
Basic formula for the cost approach
Reproduction or Replacement Cost New
- Total Depreciation
+ Site Value
= Property Value
A house would cost $200,000 to build new. It is 10 years old and has sustained a total of 15% depreciation. It sits on a site worth $40,000. What is its value by the cost approach?
Cost new of improvements $200,000
Total Depreciation ($200,000 x .15)
- $ 30,000
Depreciated value of improvements $170,000
Site value
+ $ 40,000
Indicated value by cost approach $210,000
Reproduction Cost
The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and obsolescences of the subject building.
Replacement Cost
The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout.
Methods of Estimating Cost New
- Index Method
- Comparative Unit Method
- Unit-in-Place Method
- Quantity Survey Method
Index Method
The index method takes the actual cost of a building at some time in the past and brings it up to current cost by using a cost index, similar to a cost of living index. It has limited applicability.
Comparative Unit Method
The comparative unit method is the most commonly used method in residential appraising. It estimates costs of a building based on a unit of building area, usually square footage. Cost per square foot can be extracted from the local market or cost services such as Marshall & Swift.
Unit-in-Place Method
In the unit-in-place method, large elements of cost are broken down into segments, for example, the cost per square foot of drywall, cost per square foot of flooring, cost per lineal feet of kitchen countertops and cabinets, etc. Unit-in-place costs may be derived from the local market or cost services such as Marshall & Swift. This method is sometimes referred to as the segregated cost method.
Quantity Survey Method
The quantity survey method is the most detailed and comprehensive method. It breaks the components of the structure down to fine details, such as how many 2x4s, how many sheets of plywood, how many screws and nails are needed, plus the labor to install them. It requires thorough and detailed knowledge of construction, and as such, is rarely used by appraisers.
The cost approach is most applicable when:
- A lack of market activity precludes the use of the sales comparison approach
- The property is not typically income producing and the income capitalization approach is not pertinent
- The building improvements are new or relatively new
- The land value is well supported
- The improvements represent the highest and best use of the land as though vacant
- Estimating the use value of special purpose properties
- Building additions or renovations are being considered
- The appraisal requires that land and improvements be valued separately; such as for insurance or accounting purposes
- Land value is a significant portion of the overall value; such as with agricultural properties
The cost approach is least applicable when:
- The depreciation is a type that is more difficult to estimate
- Data is scarce or lacking to estimate the amount of entrepreneurial profit
- Data is scarce or lacking to estimate the land value
- The interest valued is anything other than fee simple
A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.
defines
Cost Approach
