Chapter 5 Flashcards
The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.
Principle of Substitution
Reproduction or Replacement Cost New
- Accrued Depreciation
+ Site Value
= Property Value
Cost Approach Formula
Cost Approach Formula Example
A very simplistic example would be as follows. A house cost $200,000 to build new. It is 10 years old and has sustained a total of 15% depreciation. It sits on a lot worth $40,000. What is its value by the cost approach?
Cost New $200,000 minus Accrued Depreciation ($200,000x.15) - $30,000 = $170,000
+ Site Value ($ 40,000)
= 210,000
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.
Cost Approach
Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
Fee Simple Interest
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
Reproduction Cost
The cost to create a virtual replica of the existing structure, employing the same design and similar building materials. The current cost of an identical new item.
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
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.
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
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.
Depreciation
In accounting, an allocation of the original cost of an asset, amortizing the cost of the asset’s life; calculated using a variety of standard techniques.
Depreciation
oldest, first approach to value
Cost Approach
Second approach to value after 1940’s
Sales Comparison appraoch
The most common type of approach to value today
Sales comparison approach
What approach or approaches to value are required by USPAP?
appraisers are required to develop whatever approaches are necessary to produce credible assignment results.
Fannie Mae may say the cost approach is not required - by them, BUT if the property is new….
the cost approach might be necessary for credible results.
A lack of market activity _________ the use of the sales comparison approach. You can’t use the sales comparison approach without a _______ amount of reliable sales _______
Precludes (prevents from happening); reasonable; data
The _________approach is best applied when the typical purchaser would be an investor who is buying the property for investment purposes.
income
You can virtually always do a ______ approach! I don’t care how old it is, what type of property it is, or what the market activity is. I can research a property, estimate its cost new, subtract apparent depreciation, and add site value.
cost
this approach is the one universal approach that can be applied to any kind of improved real property.
cost approach
This approach has good applicability when the improvements we are appraising are new or relatively new.
cost approach
The first step in this approach is to estimate the cost new of the building improvements. If it was recently built, it most likely was constructed of modern materials, utilizing modern construction techniques.
cost approach
The second step in this approach is the value of the land or site. If it’s a standard lot and there are adequate sales in the marketplace, it becomes a relatively easy and straightforward task to arrive at that value.
cost approach
The ideal situation for developing a cost approach is where the current building improvements truly do represent the _______ ___ ______ _____ of the land as though vacant. Any time we stray away from that ideal, there is potential for errors.
highest and best use
Special-purpose properties are sometimes called __-_______t properties. They represent things that are not normally bought and sold in the marketplace.
no-market
Let’s suppose you are asked to appraise a 30-year-old ranch house with a proposed addition that will include 800 square feet, three rooms, a full bath, and a fireplace. You may not be able to find sales of comparable properties that include an older house with a large, new addition. Assume the house will still be of single-family orientation and there would not be a market for such property as an investment. Which approach would you use?
Cost approach
The appraisal requires that land and improvements be valued ___________; such as for insurance or accounting purposes
seperately
The value of the land and the improvements also needs to be separated when considering _____________ for income tax purposes.
depreciation
Land value is a significant portion of the overall _______; such as with agricultural properties
value
When 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
True or false: Use the cost approach even if the depreciation is a type that’s difficult to estimate
false
True or false: You should void the cost approach if data is scarce or lacking to estimate the amount of entrepreneurial profit or the land value
true
The three legs supporting the value estimate by the cost approach:
cost, depreciation and land value
Tue or false: Avoid the interest valued is anything other than fee simple
True
The amount an entrepreneur expects to receive for his/her contribution to a project is
depreciation
entrepreneurial profit
entrepreneurial incentive
reproduction cost
entrepreneurial incentive
True or False: The cost approach is most applicable in situations where the site value is not well-supported.
False
The cost approach is primarily based on which valuation principle?
contribution
change
reconciliation
substitution
substitution
True or False: If appraising something other than fee simple interest, an appraiser can make an adjustment to the indicated value by cost approach in order to reflect the value of the property interest being appraised.
True
