Module 8&9

Question 1

cost approach

Answer 1

a set of procedures that which a value indication is derived for a fee simple interest

Question 2

Cost approach procedures:

Answer 2

1) est of current cost of construct the existing structure plus any entrepreneurial incentive
2) depreciation is deducted from this derived cost & the est. improved land or site value is added
Note: Only approach that requires a separate land value

Question 3

4 reasons appraisers must be efficient with cost analysis

Answer 3

1)cost can be a proxy for valuation (cost to build)
2) allows the appraiser to evaluate individual component costs
3) cost is often used in approaches as a basis of analysis or used as cross check for adjustments
4)professional stds require competent analysis, including the appraiser’s knowledge and application of costs

Question 4

Best time to use cost approach

Answer 4

when improvements are proposed or recently completed & represent the highest & best use of improved land or site bc least likelihood of depreciation

Question 5

depreciation

Answer 5

loss due to a physical, functional, or locational causes. The more depreciation present the less reliable the value indication & less applicable to cost approach

Question 6

special purpose or limited market

Answer 6

jail, library, courthouse, might be valued using the cost approach once the other approaches require data (comparables) that may not exist. Used when determining separate values for improved land & improvement, such as real estate tax assessments, highest & best use analysis depreciation for federal income tax reporting

Question 7

Site

Answer 7

improved land (or parcel) that does not require further land development or subdivision. It is ready for property improvements suited to its highest & best use.

Question 8

cost approach based on principles

Answer 8

1)highest & best use - existing improvements have value equal to the amount they contribute to the improved land (site), or they may be penalized by an amount equal to cost to remove from site
2)supply/demand - shifts in supply/demand cause costs to increase & decrease, & after the need for supply of diff types of buildings
substitution - no prudent power would pay more for a property than the cost to construct 1 of equal
3) balance - imbalance due to over improvement or under improvement

Question 9

cost of construction effective date

Answer 9

is appraisal date

Question 10

reproduction cost

Answer 10

replacement if no over improvements the building improvements proposed or relatively new & construction components and design are impossible to tell apart from current building stds

Question 11

hard (direct) cost

Answer 11

labor & materials

Question 12

soft (indirect) cost

Answer 12

expenditures not part of construction, i.e. building permits, plats, survey, consulting, appraisal fee, taxes, insurance, etc.ll

Question 13

entrepreneurial incentive

Answer 13

mkt derived figure that rep the amount an entrepreneur expects fwd looking pre-construction in order to get enticed or wants to receive as comp for providing coordination & expertise & assuming the risk associated with the development of a project

Question 14

entrepreneurial profit

Answer 14

mkt value of property (post construction) total cost of development including hard & soft costs. Rep as % of direct costs or combo of direct & indirect costs with or without site value
Note: mkt research & interview with developer is used to derive profit

Question 15

3 methods for estimating cost

Answer 15

1) comparative unit method
2) unit place method
3) quantity survey method - pro cost estimator or appraiser

Question 16

comparative unit method

Answer 16

est replacement cost by using estimating service, looks up by sq foot, makes adjustment for location, size, and quality

Question 17

unit in place method

Answer 17

total building cost is established by adding together unit cost for various building components as installed (roof, walls, foundation, electrical system)
Costs applied on the basis of sq ft, floor area, linear feet, of wall length at a certain height