week 3 - Cost approach Flashcards
difference between land and site value
Land: The earth’s surface, both land and water, and anything that is attached to it whether by the course of nature or human hands; all natural resources in their original state e.g. mineral deposits, wildlife, timber, fish, water, coal deposits, soil.
Site : Land that has been improved so that it is ready to be used for a specific purpose
difference between offiste and onsite improvements
Off-site: Improvement located off the property itself but necessary
On-site: physical enhancements to the land
what is the market resdual apporach
Land/site value=sale price of property-contributory value of improvements
Subject rural property:
Sale price : $1,200,000
Contributory value of improvements (House and barn): $300,000
Market value of rural land?
$1,200,000-$300,000=$900,000
what is the allocation approach
Land/site value=sale price of property * typical ratio of land value to total property value
The subject property is a single-family residence located in a rural area and was recently sold for $1,600,000. The new owner of the property is planning to demolish the existing house and develop it as a farm land.
A recent property sale similar to the site of the subject property is found:
Sale price Land value Date of sale
$1,350,000 $810,000 3 months ago
It is reported that the property prices in this area show an increase of 0.75% per month while land prices show an increase of 0.5% per month.
What is the market value of the land?
what is the land residual technique
Land/site value=NOI attributable to the land/ proper market-derived rate
The subject rural land can generate NOI of $120,000. Analysis of sales of comparable properties on ground leased properties located in the area identifies following information.
Net operating income Sales price
Comparable 1 $110,500 $2,833,000
Comparable 2 $100,050 $2,515,000
Comparable 3 $110,000 $2,750,000
Estimate the value of the subject rural land.
Cap rate for Comp1= $110,500/$2,833,000=3.90%
Cap rate for Comp2= $100,050/$2,515,000=3.98%
Cap rate for Comp3= $110,000/$2,750,000=4%
Market cap rate=(3.9%+3.98%+4%)/3= 3.96%
Value of the subject rural land= $120,000/3.96%=$3,030,303
explain ground rent approach
Land/site value=Ground rent/proper market-derived rate
explain the foundation of the cost method
Classical economic concept of cost equals value
Rationale that an informed rational potential buyer will pay no more for a property than the cost of buying the land and buying a structure that will provide the same amount of utility
Property value = current cost of reproduction (or replacement, including entrepreneurial)- depreciation + site value
when is cost method suitable
Property that is rarely, if ever, sold in the market due to uniqueness arising from its specialised purpose, nature and design, its configuration, size, location, or otherwise.
In most cases, there is limited or no directly comparable market information for valuers to consider. Other valuation methods are not applicable due to limited or non-existent market data.
Valuation of specialised properties
cost method process
- ) Estimate the value of the site as if it were vacant.
- ) Select cost basis: reproduction cost or replacement cost
- ) Estimate the cost to reproduce or replace the building at the present time
- )Estimate all elements of accrued depreciation
- )Deduct total depreciation from the reproduction/replacement cost to arrive at the current depreciated value of the building, and plus the land value ( and any remaining site improvement) to the current depreciated value of the building to arrive at the market value
select cost basis: reproduction or replacement cost
Reproduction cost- Estimated cost to construct an exact duplicate of the building being appraised, insofar as possible using the same materials, construction standards, design layout, and quality of workmanship and embodying all the deficiencies, super-adequacies and obsolescence of the subject building
Replacement cost- The estimated cost to construct a building with utility equivalent to the building being appraised, using contemporary materials, standards, design, and layout. When this cost basis is used some existing obsolescence in the property is assumed to be cured
The decision to use reproduction or replacement cost is often dictated by
The age of the structure
Its uniqueness and historical significance
Any difference between its intended use at the time of construction and its current HABU
estimating construction costs
Index method – Assumes that the replacement/reproduction cost is simply the original construction cost times a cost index
Comparative unit method – For relatively standardized structures, the unit value of the building is estimated by that of similar building.
Unit in place method – The costs of the individual components in the building are used to estimate the overall replacement cost
Quantity survey method – Identifies the exact materials required to reproduce the structure to estimate the cost (most comprehensive and accurate)
explain principle of depreciation
Primary goals are to identify all forms of depreciation recognised by the market, to treat all these forms of depreciation, and to charge only once for each form of depreciation.
Selection between reproduction cost and replacement cost
Distinguish actual age, effective age and economic life
3 methods to estimate the depreciation
Residual method: it relies on the availability of comparable sales from which depreciation can be extracted, to calculate depreciation rate or depreciation percentage .
Economic age-life method : depreciates on a straight line pattern
Total cost * (effective age/total economic life) =depreciation
3) Breakdown method: breakdown the depreciation into physical deterioration, functional obsolescence and external obsolescence. More comprehensive and detailed.
explain the breakdown method to estimate the depreciation
Most comprehensive and detailed, following the following order to estimate three types of depreciation:
Physical deterioration – result of wear and tear, weathering from the elements, neglect etc
Functional obsolescence – features, design, and other elements of the building that are not up to modern standards, super-adequacy or inadequacy
External obsolescence – loss of value due to influences outside the property
Distinguish between Short-life and long-life
Distinguish between Curable and incurable
