Part 8 Flashcards
Introduction to the Cost Approach
- Estimate the value of the site as though vacant and available to be put to its highest and best use.
- Estimate the direct and indirect costs of the improvements.
- Estimate the entrepreneurial incentive.
- Add Steps 2 and 3 together to obtain the total current cost.
- Estimate the depreciation from three sources
* a. Physical deterioration
* b. Functional obsolescence
* c. External obsolescence - Deduct the depreciation from total current cost to derive an estimate of the depreciated cost of improvements.
- Add the contributory (as is) value of any site improvements.
- Add the site value to the total depreciated costs.
This is an overview of what?
A quick overview of the eight-step process for the cost approach
______ is an exact replica of the current improvement
Reproduction Cost
____ is equivalent in utility to the current improvements.
Replacement cost
These are hard cost expenditures for the labor and materials used in the construction of improvements.
Direct (hard) costs
These are soft cost expenditures (or allowances) that are necessary components but are not typically part of the construction contract.
Include building permits, appraisal fees, Insurance, etc
Indirect (soft) costs
A market-derived figure that represents the amount an entrepreneur expects or wants to receive as compensation for providing coordination and expertise and assuming the risks associated with the development of a project.
Entrepreneurial incentive
A market-derived [historical] figure that represents the amount an entrepreneur received for his or her contribution to a past project to compensate for his or her time, effort, knowledge, and risk—and can be used to estimate entrepreneurial incentive.
Entrepreneurial profit
- Comparative-unit method
- Unit-in-place method
- Quantity survey method
These are the three what?
The three cost estimating methods used by appraisers.
The most commonly used cost-estimating method. When an appraiser estimates replacement cost by using a cost-estimating service; looks up the cost per square foot; and makes adjustments for location, size, time, and quality, that appraiser is using the __________ __________ __________ of cost estimating.
Comparative-unit method
1/3 cost estimating methods
The total building cost is estimated by adding together the unit costs for the various building components as installed (e.g., the roof, walls, foundation, excavation, electrical system, etc.). Standardized costs are used for structural components. The costs may be applied on the basis of square feet of floor area or linear feet of wall length at a certain height.
Unit-in-place method
2/3 cost estimating methods
In this method, the quantity and quality of all materials used and all categories of required labor are estimated and unit cost figures are applied to arrive at a total cost estimate for labor and materials. Costs for cubic yards of concrete, board feet of lumber, pounds of nails, feet of re-enforcing bar, and hours of labor are examples of the costs used in this method. It is the most comprehensive, time-consuming, and detailed method of measurement. It frequently requires the services of an experienced cost estimator and is rarely used in routine appraisal assignments.
Quantity survey method
3/3 cost estimating methods
To convert a known historical cost into a current cost estimate, the appraiser can apply a percentage change based on an index service such as the Bureau of Labor Statistics (BLS) or use a comparative cost multiplier supplied from a cost service provider such as Marshall & Swift—CoreLogic.
Cost-index trending
Cost-index trending is not a true cost-estimating method such as those previously mentioned, but it can be a useful tool when properly applied by an appraiser.
After an intense natural disaster creates the need for massive rebuilding, the cost of building materials increases. Which economic principle does this illustrate?
This was a quiz question
supply and demand
Shifts in supply and demand cause costs to increase and decrease while also altering the need for a supply of different types of buildings. Changes in the amount of new construction may affect the value of existing buildings.
If an appraiser estimates the current cost of individual units of construction and adds them up, what method is the appraiser using?
This was a quiz question
unit-in-place
The appraiser is using the unit-in-place method, which segregates the building into units of construction (e.g. exterior wall, foundation, insulation, etc.)
An appraiser measuring a residential structure would most likely use
This was a quiz question
gross living area.
Gross living area (GLA) is commonly used to describe the size of residential properties. As defined, GLA is habitable, finished, above grade space, measured from the outside of the residence.
Chandra is appraising a residential property. The house was built in 1981 and is in average condition. The appraiser is using a cost service provider to develop the cost approach. What type of cost will she be using in this appraisal?
This was a quiz question
replacement cost
Chandra will be using replacement cost. Most cost services usually provide replacement cost data, not reproduction cost data. Also, since the home is not historic or specialized, it likely does not warrant developing a reproduction cost.
An estimate of reproduction cost includes which of the following?
This was a quiz question
the estimated cost of all items as of the effective date of appraisal with materials as they were installed
Reproduction cost includes the cost to build a replica using the same construction materials and techniques, but at costs on the effective date of value, not the date of construction.
A buyer will not pay more for a property than the cost to construct one of equal desirability and utility without undue delay. What principle does this illustrate?
This was a quiz question
substitution
Substitution affirms that no prudent buyer would pay more for a property than the cost to construct one of equal desirability and utility without undue delay.
If an appraiser estimates the current cost of individual units of construction and adds them up, what method is the appraiser using?
This was a quiz question
unit-in-place
The appraiser is using the unit-in-place method, which segregates the building into units of construction (e.g. exterior wall, foundation, insulation, etc.)
Which of the following statements best describes entrepreneurial incentive?
This was a quiz question
the amount of money entrepreneurs expect to receive as a reward for their efforts
Entrepreneurial incentive must be present in order to entice a developer to construct the improvements. It is illogical to assume that a developer would anticipate expending a certain amount of time, energy, expertise, and money to construct a property, only to sell it for the same amount of money that had been expended. Profit must be present as the incentive for the developer.
When performing a cost analysis, where can an appraiser obtain information about the entrepreneurial incentive?
This was a quiz question
derive it from the local market
Entrepreneurial incentive is generally not included in the rates provided by professional cost service providers. Commercial property appraisers derive the entrepreneurial incentive from the local market and add it to the cost. The incentive will vary based on the type of property and the risk associated with the project development. Residential property appraisers may find that entrepreneurial incentive is more difficult to identify or measure in the market. This topic will be addressed in advanced courses.
When measuring a commercial office structure, an appraiser identifies the amount of space on which the rent is based. Which measurement is the appraiser using?
This was a quiz question
net rentable area
The appraiser is using net rentable area, which is the amount of space on which the rent is based, calculated according to local practice.
The second step of the cost approach is to estimate direct (hard) and indirect (soft) costs as of
This was a quiz question
the effective date of the appraisal.
Which of the following best describes gross living area (GLA) in single-unit residences?
This was a quiz question
GLA is the above-grade, finished, habitable, residential space measured from the outside.
As defined, GLA is habitable, finished (heated and/or air-conditioned), above-grade space, measured from the outside of the residence.
When an appraiser estimates cost using a cost manual, which method is being used?
This was a quiz question
comparative unit
Which of the following best describes direct costs?
This was a quiz question
expenditures for the labor and material used in the construction of the improvements
Direct costs are typically part of the construction contract and include material and labor.
To which kind of cost should an appraiser attribute labor and materials to?
This was a quiz question
direct cost
Direct costs are typically part of the construction contract and include material and labor.
The total construction cost of a structure requires consideration of which of the following?
This was a quiz question
direct and indirect costs along with entrepreneurial incentive
Direct and indirect costs are not enough. Entrepreneurial incentive must be present in order to entice a developer to construct the improvements.
In terms of cost, what type of cost are appraisal fees?
This was a quiz question
indirect costs only
