Ch 5 Flashcards
basic formula for the cost approach:
Reproduction or Replacement Cost New
- Accrued Depreciation
+ Site Value
= Property Value
“A set of procedures through which a value indication is derived for the fee simple estate by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive or profit, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated value of the fee simple estate in the subject property to reflect the value of the property interest being appraised.” defines
Cost Approach
“Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the xxx. “ defines
Fee Simple
governmental powers of taxation, eminent domain, police power, and escheat
“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 obsolescence of the subject building.” defines
Reproduction cost
“The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design and layout. “ defines
Replacement cost
“The amount an entrepreneur expects to receive for his or her contribution to a project. Entrepreneurial incentive may be distinguished from entrepreneurial profit (often called developer’s profit) in that it is the expectation of future profit as opposed to the profit actually earned on a development or improvement. The amount of entrepreneurial incentive required for a project represents the economic reward sufficient to motivate an entrepreneur to accept the risk of the project and to invest the time and money necessary in seeing the project through to completion.” defines
Entrepreneurial incentive
In appraising, a loss in property value from any cause; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date. defines
Depreciation
Which one is the oldest of the three traditional approaches that appraisers use?
Cost Approach
Fannie Mae/Freddie Mac forms stress that the x approach and the x approach are not required by them.
cost
income
Fannie Mae says you don’t x to complete the cost approach - they don’t say you x complete the cost approach.
have
cannot
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
building improvements are new/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, as with agricultural properties
A parcel of unimproved land would not be appraised using a x approach.
cost
(…as there is nothing to “cost estimate” on the subject.)
overimprovement also called
superadequacy
The cost approach requires that land and improvements be valued x
separately
The value of the land and the improvements also needs to be separated when considering depreciation for
insurance and income tax purposes.
The cost approach is least applicable:
- The depreciation is a type that is 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 - adjustments must be made
If the purpose or intended use of an appraisal is to provide an accurate measurement of loss, then x cost should prove to be more accurate.
reproduction
When replacement cost is used, it eliminates any xx that may be present in the structure and replaces it with xx that is acceptable in the marketplace today.
functional obsolescence
functional utility
Cost data may be obtained from:
- Construction contracts for similar properties
- Appraiser’s files
- Local building contractors
- Professional cost estimators
- Cost estimating services
Every time you do an appraisal for a proposed construction, try to get a hold of and keep a copy of the xx
construction contract.
Whatever the source of the cost data, all cost estimates to be used in the cost approach need to include three basic ingredients:
- Direct costs
- Indirect costs
- Entrepreneurial incentive
“Expenditures for the labor and materials used in the construction of improvements; also called hard costs. “ defines
Direct Costs
“Expenditures or allowances for items other than labor and materials that are necessary for construction, but are not typically part of the construction contract. Indirect costs may include administrative costs; professional fees; financing costs and the interest paid on construction loans; taxes and the builder’s or developer’s all-riskinsurance during construction; and marketing, sales, and lease-up costs incurred to achieve occupancy or sale. Also called soft costs. “ defines
Indirect Costs
“Expenditures or allowances for items other than labor and materials that are necessary for construction, but are not typically part of the construction contract. Indirect costs may include administrative costs; professional fees; financing costs and the interest paid on construction loans; taxes and the builder’s or developer’s all-riskinsurance during construction; and marketing, sales, and lease-up costs incurred to achieve occupancy or sale. Also called soft costs. “ defines
Indirect Costs
