cost approach
A method of estimating value based on the economic principle of substitution; the value of a building cannot be greater than the cost of purchasing a similar site and constructing a building of equal utility.
Name three steps in the cost approach?
1) Estimating the cost of replacing the improvements. 2) Estimating and deducting any accrued depreciation. And 3) Adding the value of the lot to the depreciated value of the improvements.
A property's replacement cost is?
is how much it would cost to build improvements with the same utility as those on the subject property, using modern materials and construction methods.
a property's reproduction cost is?
is how much it would cost to build an exact replica of the improvements.
This can be a reliable indication of value if the property being appraised is new or nearly new, because the materials and skilled labor necessary to replicate the property would sti
What are the ways to estimate replacement costs?
the square-foot method, the unit-in-place method, and the quantity survey method.
define square-foot method?
the appraiser multiplies the structure's square footage by the current construction cost per square foot. This is the method appraisers use most often to estimate replacement cost.
To determine the construction cost per square foot, an appraiser can use ?
the cost per square foot of comparable new structures, or he can refer to cost manuals that list current construction costs.
the square footage of a home is determined by ?
Measuring its outside dimensions, excluding the garage, basement, and porches.
With the unit-in-place method of estimating replacement cost, the appraiser estimates ?
separately the costs of the various components of the subject structure, then adds them together to find the total cost.
The unit-in-place method involves the use of ?
cost manuals or bids from subcontractors.
The quantity survey method of estimating replacement cost involves a
detailed breakdown of all the costs expected in the construction of the building.
The costs of materials and labor are calculated much more precisely than they are in the unit-in-place method.
After estimating replacement cost, an appraiser applying the cost approach has to estimate ?
depreciation.
What are three categories of depreciation?
physical deterioration, functional obsolescence, and external obsolescence.
Physical deterioration is ?
a loss in value due to property damage, construction defects, wear and tear, or age.
It's easier to spot this type of depreciation than the other types, and easier to estimate its impact on value.
Physical deterioration may be in two different types of states?
curable or incurable.
Depreciation is considered curable if ?
the cost of correcting it could be recovered in the sales price when the property is sold.
Depreciation is incurable if it's ?
impossible to correct, or if it would cost so much to correct that it would be impractical to do so.
Curable physical deterioration is often referred to as
deferred maintenance.
Functional obsolescence is ?
a loss in value due to functional inadequacies such as defects in design, outdated fixtures, or an inadequate floor plan.
obsolete kitchen appliances, one-car garages, and too few bathrooms in relation to the number of bedrooms.
Any defect within the boundaries of the property itself that isn't physical deterioration is ?
Functional obsolescence
External obsolescence is ?
a loss in value from causes outside the property itself.
External obsolescence is also called ?
economic obsolescence, or (less frequently) environmental or locational obsolescence.
Adverse zoning changes, undesirable surroundings, traffic congestion, a shortage of essential services nearby�such as transportation, schools, and shopping�are all examples of ?
external obsolescence.
Proximity to nuisances will result in a loss in value due to ?
external obsolescence. For example, these homes lost value because a high-voltage line was built so close to them.
Most forms of physical deterioration are curable (deferred maintenance), because ?
because the cost of the correction usually results in an increase in value that justifies the expenditure. The value of a home needing a new roof is almost always increased by the cost of the new roof.
if the physical deterioration is so extensive that the cost of correcting it is prohibitive, the depreciation is considered ?
incurable.
To be curable, the cost of replacing the outmoded or unappealing aspect of the property must not exceed ?
any increase in value that results from the replacement.
A house that's positioned too close to the street is an example of ?
incurable functional obsolescence
Since external (economic) obsolescence is the result of negative influences from outside the site, it is always considered ?
incurable
because a property's value is generally affected more by external forces than by ?
physical deterioration or functional obsolescence.
In fact, external obsolescence accounts for greater losses in value, by far, than the other two forms of depreciation combined.
An appraiser notes all of the forms of depreciation affecting the subject property, and then determines how much each of them reduces the property's value. This is done by ?
subtracting the total amount of depreciation from the replacement cost.
For the final step in the cost approach, the appraiser adds ?
The estimated value of the land to the depreciated replacement cost of the improvements. The appraiser arrives at the estimated value of the land by using the sales comparison approach, comparing recently sold comparable sites to the subject property's si
An appraiser who calculates the building's reproduction cost and then analyzes depreciation is most likely using what valuation method?
cost approach
An example of physical depreciation of a property is ?
deterioration because of normal wear and tear.
A property has lost value because its maintenance and upkeep have been neglected. This would be an example of ?
physical deterioration
A licensee who is taking a listing on a property finds a number of problems that need to be fixed, such as several leaking faucets and an electrical system that intermittently cuts out. This would be an example of ?
physical deterioration
Charles takes very good care of his home, but recently discovered that some termites have made a nest in the floor. This type of depreciation is probably ?
curable physical deterioration
Which of the following actions would most likely create the largest increase in the value of a property?
Installing a second bathroom in a house with four bedrooms and only one bath.
In the appraisal of a single-family home, which of the following is an example of functional obsolescence?
Outdated plumbing
An older retail building has narrow hallways and window air conditioning units rather than central AC. These would be examples of ?
functional obsolescence.
Which of the following is an example of functional obsolescence?
Only bathroom can be accessed only through bedroom.
Which of the following would have the greatest negative effect on a property's value?
The property is located next to a busy freeway. External obsolescence, such as being located next to a freeway, often has the greatest effect on a property's value.
The value of a property will NOT be reduced by the fact that the home ?
is next to a local playground.
An appraiser does a neighborhood analysis to determine ?
external obsolescence. (also called economic obsolescence or external inadequacy) is a loss in value resulting from factors outside the property itself, such as proximity to an airport.
Regional growth leads to the addition of a third runway at the airport. The increased airplane noise causes nearby houses to suffer is called?
external obsolescence.
When determining the value of a vacant lot, an appraiser will typically use the ?
sales comparison approach. referring to the sales prices of similar lots that were recently sold.