Chapter 12 Flashcards
7 steps for market extraction
How to find economic life:
Cole has been working on an appraisal assignment and has estimated
the land value at $75,000 and the replacement cost at $260,000. Cole
estimates the economic life at 80 years and the remaining economic life
at 60 years.
a. What is the effective age?
b. What is the percent of accrued depreciation?
c. What is the depreciated cost of the improvement?
d. What is the indicated value using the cost approach?
a. 80 years − 60 years = 20 years effective age (1)
b. 20 years / 80 years = 0.25 or 25% depreciation (2)
c. $260,000 × 0.25 = $65,000 depreciation (3)
$260,000 − $65,000 = $195,000 depreciated cost of building (4)
d. $195,000 + $75,000 = $270,000 value by cost approach
If the effective age is 15 years and the remaining economic life is 60 years,
what is the percent of accrued depreciation?
If the participants get an answer of 25%, that‛s incorrect!
15 effective age / 75 economic life = 20% (2)
Bob is taking courses in how to become an appraiser and has a dog named
Bart. He owns a building that has a current cost of $400,000. Economic life
is 80 years and IO is $35,000. The capitalization rate is 9% and remaining
economic life is 70 years. What is the percent of depreciation for the building?
80 years − 70 years = 10 years effective age (1)
10 / 80 = 0.125 or 12.5% accrued depreciation (2)
A property sold for $925,000 and the appraiser concluded the land value is
$250,000 based on a comparison of land sales. The appraiser’s analysis of
the improvements estimates the building has an effective age of 10 years and
its replacement cost today is $843,750.
What is the annual percent of depreciation for the building?
a. 2.5%
b. 18.25%
c. 2%
d. 20%
Hint: An initial step must be taken to derive the depreciated cost of the
building before the depreciation formulas can be applied.
$925,000 − $250,000 = $675,000 depreciated building cost
$843,750 − $675,000 = $168,750 amount of depreciation (4)
$168,750 / $843,750 = 0.20 or 20% accrued depreciation (3)
0.20 / 10 years = 0.02 or 2% annual depreciation rate
Hagen has estimated the current cost on a building at $435,000 and the land
is valued at $150,000. Comparable buildings of similar age and condition
have an economic life of about 90 years. Hagen has estimated the remaining
economic life at 75 years.
What is the value of the property by the cost approach?
a. $512,500
b. $362,500
c. $541,500
d. $487,500
90 years − 75 years = 15 years effective age (1)
15 / 90 = 0.1666… or 16.666…% depreciation (2)
$435,000 × 0.1666… = $72,500 amount of depreciation (3)
$435,000 − $72,500 = $362,500 building cost (4)
$362,500 + $150,000 = $512,500
Note: 15 divided by 90 produces a nonterminating decimal.
Useful life
The period of time over which a structure or a component of a property may
reasonably be expected to perform the function for which it was designed
Remaining useful life
The estimated period during which improvements will continue to provide utility;
an estimate of the number of years remaining in the useful life of the structure
or structural components as of the effective date of the appraisal
What type of wall enclosure for a porch is the most costly?
A. knee wall with glass
B. open with post supports
C. screen only
D. solid wall
A
In the marketplace, a commercial broker might refer to a property as a “Class A”
building. This rating refers to
A. a rating established by the taxing district.
B. competitive ranking for leasing purposes.
C. construction classification based on Marshall & Swift—CoreLogic.
D. the building’s Blue Book classification
B
In the cost approach, an appraiser may categorize high interest rates as what type
of depreciation accruing to the property?
A. external obsolescence
B. financial obsolescence
C. functional obsolescence
D. physical deterioration
A
Jacobs is trying to estimate the depreciation of a building’s roof by the breakdown
method. He knows that the useful life of the roof is 25 years and the actual age
is 10 years. Jacobs’ trainee, however, believes the effective age of the roof is 15
years due to some storm damage. What is the percent of depreciation for the roof?
A. 28.5%
B. 37.5%
C. 40%
D. 60%
C. 40% (10 / 25 = 40% depreciation)
Hopkins sold a warehouse for $950,000, in which the land value was estimated
at $250,000. If the cost to replace the existing warehouse building is
$1.5 million, what is the dollar amount of depreciation accrued to the building?
A. $550,000
B. $700,000
C. $800,000
D. $1,250,000
C
(Step 1: $950,000 − $250,000 = $700,000 bldg. value)
(Step 2: $1,500,000 − $700,000 = answer)
A manufactured home has an effective age of 30 years and a remaining economic
life of 20 years. What is the percent of depreciation for the building?
A. 40%
B. 50%
C. 60%
D. 67%
C
(30 / 50 = 60% depreciation)
