Ch 6

Question 1

There are three different kinds of depreciation:

Answer 1

• Physical deterioration
• Functional obsolescence
• External obsolescence

Question 2

Functional Obsolescence:

Answer 2

= functional inutility

Layout
Outmoded Items
Inadequacies (Heating, Insulation)
Superadequacies (gold faucets)
Atypical (style of the house, pool)

Question 3

External Obsolescence

Answer 3

= economic, environmental or locational obsolescence

incurable by owner
can be temporary or permanent
occurs off site

Examples:
* High unemployment
* Building moratoriums
* Recessions
* Traffic noise
* Road
* Rail line or airport
* Location near hazardous influences:
o Air or water pollution, smog or odor o Toxic wastes
o Abandoned landfills
o High tension power lines
o Above or below ground high pressure gas lines
* Unsightly views
* Abandoned or boarded up buildings nearby
* High crime rate or unsafe living conditions
* Poor access

Question 4

The three main methods of estimating depreciation are:

Answer 4

• Age-life method
• Modified age-life
• Breakdown method or observed condition

Question 5

What is the age life method?

Answer 5

A method of estimating depreciation
- one of the two primary methods
- this method does not distinguish between long and short lived items
- assumes a straight line pattern of depreciation
- less realistic method since a building depreciates more towards the end

Question 6

What is the Breakdown Method?

Answer 6

A method of estimating depreciation
- not being used by appraisers
- very detailed, time consuming research
- treats each item separately

Question 7

If a total economic life is estimated to be 60 years and the current effective age is estimated to be 20 years, then the remaining economic life is x

Answer 7

40 years. (60 - 20 = 40)

Question 8

In the age-life method, total depreciation is estimated by calculating the ratio of the x of a property to its x. This gives a x of the life that has been used up.

Answer 8

effective age
economic life
percentage

Question 9

Formula Age Life Method

Answer 9

Effective age
/ Total economic life
X total cost
= depreciation

Question 10

A 20 year old building that would cost $220,000 to build new today. It is in good condition, and you estimate the effective age to be 15 years. Your estimate of total economic life is 60 years, based on analysis of similar properties. How much is the estimated depreciation calculated with the age-life method?

Answer 10

15
/60
x $220,000 = $55,000 depreciation

Question 11

When is modified age life method used?

Answer 11

Used to estimate depreciation.
This is the preferred method when there are substantial deferred maintenance

Question 12

The cost new of the subject property is $235,000, the site value is $70,000 and the effective age is 25. The total economic life is estimated to be 60 years.
The subject has deferred maintenance items that total $4,500. After these repairs, the effective age will be reduced to 20 years. What is the value using the cost approach?

Answer 12

Modified Age Life Method:

$235,000 - $4,500 = $230,500 Remaining Improvement Cost

20 (effective age)
/ 60 (total economic life)
= .333 (percent of depreciation)

Cost Approach
Remaining Improvement Cost $230,500
Minus Depreciation ($230,500 x .33) - 76,065
Depreciated Cost of Improvements $154,435
Plus Site Value $70,000
Value by Cost Approach $224,435
Rounded to $225,000

Question 13

The cost new of the improvements is $245,200, the site value is $60,000, and the effective age is 17. The total economic life expectancy judged by comparable sales is 55 years. What is the value using the cost approach?

Answer 13

Age Life Method:

17 / 55 = .309 or 30.9%
$245,200 X .309 = $ 75,767
Total cost of the improvements $245,200
Less total depreciation - 75,767
Depreciated cost $169,433
Plus site value + 60,000
Indicated value by the cost approach $229,433
The indicated value should be appropriately rounded. In this case, we would probably round to $230,000.

Question 14

Physical Deterioration can be divided in 3 categories:

Answer 14

• Deferred maintenance
• Short-lived items
• Long-lived items

Question 15

Deferred maintenance is considered to be x. Conversely, depreciation charged to the short-lived and long-lived items is x.

Answer 15

curable
incurable

Question 16

“1. A building component with an expected remaining economic life that is shorter than the remaining economic life of the entire structure.
2. An item that willprobably be replaced one or more times during the life of the improvements, such as painting or flooring.” defines

Answer 16

Short Lived Items

Question 17

Examples of short lived items:

Answer 17

• Roof covering
• Water heaters
• Carpeting
• Furnaces

Question 18

A roof on a house has an expected life of 20 years. The economic life of the house is 60 years.
We are appraising a house when it was 15 years old. We might estimate the cost to replace the roof at $4,000. How much is the depreciation for the roof?

Answer 18

Depreciation of short lived items when using the Breakdown Method:
Fifteen out of 20 years means it has lost .75 or 75% of its value. However, it still retains 25% of its original value.
$4,000 x .75 = $3,000 depreciation.

The roof still has a remaining value of $1,000, but the short-lived depreciation charged to the roof is $3,000.

Question 19

When applying age-life ratios we should be utilizing the x lives of those components, not the x life.

Answer 19

useful (how long can the dishwasher perform?)
economic (and not how long the dishwasher contributes value)

Question 20

Difference between short lived and long lived items?

Answer 20

Short lived: will be replaced during the life of the building/improvement
Long lived: same useful life as entire structure

Question 21

Examples of long lived items:

Answer 21

• Framing
• Foundation
• Insulation
• Underground pipes
  = bone structure of the building

Question 22

External obsolescence may be estimated by:

Answer 22

• Analysis of market data (comparing comps)
• Capitalization of income loss ($loss x GRM)

Question 23

The subject property is a house adjoining a busy interstate highway. A vacant lot next door recently sold for $60,000 and a similar lot with the same zoning, in a quiet location, recently sold for $65,000.

A house along the interstate in the next block recently sold for $340,000, and a similar house away from the interstate sold for $360,000. What is the external obsolescence for the building?

Answer 23

Market Data Analysis using the breakdown method:

There is a premium of $5,000 for less traffic noise for land sales.

Thus, the property located along the interstate suffered a $20,000 loss for the location. The external obsolescence attributable to the whole property is $20,000 ($360,000 - $340,000).
Pairing the two land sales indicates a loss of $5,000 for the land portion. Therefore, the external obsolescence attributable to the building is $15,000 ($20,000 - $5,000).

Question 24

If the costs are estimated on the simplest method of cost estimation (the xx method), then the depreciation should be measured by the simplest method of estimating depreciation (the x method).

Conversely, if the costs are calculated in a more detailed fashion, such as xx, then the xx of estimating depreciation would be more appropriate for use.

Answer 24

comparative unit
age-life

unit-in-place or quantity survey
breakdown method