Chapter 4 Cost approach, concepts and definitions Flashcards
Cost approach formula
Reproduction or Replacement Cost New
- Accrued Depreciation
+ Site Value
= Property Value
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 estate
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 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 subject property is a house that would cost $300,000 to build new. It is 15 years old and has sustained a total of 20% depreciation. It sits on a site worth $70,000. What is the subject property value by the cost approach? $220,000 $240,000 $300,000 $310,000
$310,000
The basic principle underlying the cost approach is the principle of \_\_\_\_\_\_\_\_\_. Competition Substitution Highest and best use Anticipation
Substitution
A house would cost $225,000 to build new. It is 25 years old and has sustained a total of 30% depreciation. It sits on a site worth $55,000. What is its value by the cost approach? $212,500 $217,000 $222,750 $229,000
$212,500
In using the basic cost approach formula, a value is developed for the \_\_\_\_\_\_\_\_\_\_interest. Leasehold Leased fee Fee simple Entrepreneurial
fee simple
The cost to construct a building “embodying all the deficiencies, superadequacies, and obsolescence of the subject building” is the \_\_\_\_\_\_\_\_\_\_\_\_ cost. Replication Replacement Improvement Reproduction
reproduction
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 appraisal, 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
“A loss in property value from any cause” is \_\_\_\_\_\_\_\_\_. Accrued loss Profit Change in book value Depreciation
depreciation
The \_\_\_\_\_\_\_\_ approach has diminishing applicability as a property ages. Sales comparison Cost Gross rent multiplier Income capitalization
cost
“The profit actually earned on a development or improvement” is called \_\_\_\_\_\_. Entrepreneurial incentive Earned excess Entrepreneurial profit Sweat equity
entrepreneurial profit
“The expectation of future profit” is called \_\_\_\_\_\_\_. Entrepreneurial incentive Entrepreneurial profit Wishful thinking Developer’s profit
Entrepreneurial incentive
The cost approach is least applicable when:
- The depreciation is a type that is more 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.
The subject property suffers from a type of depreciation that is difficult to estimate. Which statement is true regarding the applicability of the cost approach in this situation?
The cost approach would have good applicability in this situation.
If the property suffers from significant depreciation, it has no value and therefore cannot be appraised.
The cost approach has limited applicability because of the difficulty estimating depreciation.
Depreciation is not one of the required elements in the cost approach.
The cost approach has limited applicability because of the difficulty estimating depreciation.
The cost approach generally has good applicability in estimating the value of special-purpose properties.
True
False
true
The cost approach has good applicability when the improvements we are appraising are new or relatively new.
True
False
true
“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” is the definition of Leasehold estate Leased fee estate Fee simple estate Life estate interest
fee simple estate
The cost to construct a building “embodying all the deficiencies, superadequacies, and obsolescence of the subject building” is the \_\_\_\_\_\_\_\_\_\_\_\_\_\_ cost. Replication Replacement Improvement Reproduction
reproduction
If the subject property improvements exhibit depreciation, the cost approach Is not applicable May still be applicable Cannot be developed Must be developed
may still be applicable
The \_\_\_\_\_\_\_\_ approach has diminishing applicability as a property ages. Sales comparison Cost Gross rent multiplier Income capitalization
cost
