Chapter 5

Question 1

The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.

Answer 1

Principle of Substitution

Question 2

Reproduction or Replacement Cost New
- Accrued Depreciation
+ Site Value
= Property Value

Answer 2

Cost Approach Formula

Question 3

Cost Approach Formula Example
A very simplistic example would be as follows. A house cost $200,000 to build new. It is 10 years old and has sustained a total of 15% depreciation. It sits on a lot worth $40,000. What is its value by the cost approach?

Answer 3

Cost New $200,000 minus Accrued Depreciation ($200,000x.15) - $30,000 = $170,000
+ Site Value ($ 40,000)
= 210,000

Question 4

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.

Answer 4

Cost Approach

Question 5

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.

Answer 5

Fee Simple Interest

Question 6

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

Answer 6

Reproduction Cost

Question 7

The cost to create a virtual replica of the existing structure, employing the same design and similar building materials. The current cost of an identical new item.

Answer 7

Reproduction Cost

Question 8

The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design and layout

Answer 8

Replacement Cost

Question 9

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.

Answer 9

Replacement Cost

Question 10

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

Answer 10

Entrepreneurial Incentive

Question 11

In appraising, 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.

Answer 11

Depreciation

Question 12

In accounting, an allocation of the original cost of an asset, amortizing the cost of the asset’s life; calculated using a variety of standard techniques.

Answer 12

Depreciation

Question 13

oldest, first approach to value

Answer 13

Cost Approach

Question 14

Second approach to value after 1940’s

Answer 14

Sales Comparison appraoch

Question 15

The most common type of approach to value today

Answer 15

Sales comparison approach

Question 16

What approach or approaches to value are required by USPAP?

Answer 16

appraisers are required to develop whatever approaches are necessary to produce credible assignment results.

Question 17

Fannie Mae may say the cost approach is not required - by them, BUT if the property is new….

Answer 17

the cost approach might be necessary for credible results.

Question 18

A lack of market activity _________ the use of the sales comparison approach. You can’t use the sales comparison approach without a _______ amount of reliable sales _______

Answer 18

Precludes (prevents from happening); reasonable; data

Question 19

The _________approach is best applied when the typical purchaser would be an investor who is buying the property for investment purposes.

Answer 19

income

Question 20

You can virtually always do a ______ approach! I don’t care how old it is, what type of property it is, or what the market activity is. I can research a property, estimate its cost new, subtract apparent depreciation, and add site value.

Answer 20

cost

Question 21

this approach is the one universal approach that can be applied to any kind of improved real property.

Answer 21

cost approach

Question 22

This approach has good applicability when the improvements we are appraising are new or relatively new.

Answer 22

cost approach

Question 23

The first step in this approach is to estimate the cost new of the building improvements. If it was recently built, it most likely was constructed of modern materials, utilizing modern construction techniques.

Answer 23

cost approach

Question 24

The second step in this approach is the value of the land or site. If it’s a standard lot and there are adequate sales in the marketplace, it becomes a relatively easy and straightforward task to arrive at that value.

Answer 24

cost approach

Question 25

The ideal situation for developing a cost approach is where the current building improvements truly do represent the _______ ___ ______ _____ of the land as though vacant. Any time we stray away from that ideal, there is potential for errors.

Answer 25

highest and best use

Question 26

Special-purpose properties are sometimes called __-_______t properties. They represent things that are not normally bought and sold in the marketplace.

Answer 26

no-market

Question 27

Let's suppose you are asked to appraise a 30-year-old ranch house with a proposed addition that will include 800 square feet, three rooms, a full bath, and a fireplace. You may not be able to find sales of comparable properties that include an older house with a large, new addition. Assume the house will still be of single-family orientation and there would not be a market for such property as an investment. Which approach would you use?

Answer 27

Cost approach

Question 28

The appraisal requires that land and improvements be valued ___________; such as for insurance or accounting purposes

Answer 28

seperately

Question 29

The value of the land and the improvements also needs to be separated when considering _____________ for income tax purposes.

Answer 29

depreciation

Question 30

Land value is a significant portion of the overall _______; such as with agricultural properties

Answer 30

value

Question 31

When the cost approach is least applicable:

Answer 31

The depreciation is a type that is 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 - adjustments must be made

Question 32

True or false: Use the cost approach even if the depreciation is a type that's difficult to estimate

Answer 32

false

Question 33

True or false: You should void the cost approach if data is scarce or lacking to estimate the amount of entrepreneurial profit or the land value

Answer 33

true

Question 34

The three legs supporting the value estimate by the cost approach:

Answer 34

cost, depreciation and land value

Question 35

Tue or false: Avoid the interest valued is anything other than fee simple

Answer 35

True

Question 36

The amount an entrepreneur expects to receive for his/her contribution to a project is depreciation entrepreneurial profit entrepreneurial incentive reproduction cost

Answer 36

entrepreneurial incentive

Question 37

True or False: The cost approach is most applicable in situations where the site value is not well-supported.

Answer 37

False

Question 38

The cost approach is primarily based on which valuation principle? contribution change reconciliation substitution

Answer 38

substitution

Question 39

True or False: If appraising something other than fee simple interest, an appraiser can make an adjustment to the indicated value by cost approach in order to reflect the value of the property interest being appraised.

Answer 39

True

Question 40

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 obsolescences of the subject building.

Answer 40

Reproduction Cost

Question 41

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

Answer 41

Replacement Cost

Question 42

Two basic ways to estimate what it would cost to build a subject's building improvements brand new today

Answer 42

Reproduction costs | Replacement Costs

Question 43

Most fire and casualty insurance is written to pay an amount equal to the _______ cost of the structure. That is an eye-opener to many people.

Answer 43

replacement

Question 44

Certainly the majority of the appraisals performed today reflect the use of ________ cost if the cost approach is developed.

Answer 44

replacement

Question 45

Where does this cost data come from? Cost data may be obtained from:

Answer 45

``` Construction contracts for similar properties Appraiser's files Local building contractors Professional cost estimators Cost estimating services ```

Question 46

A prime source of cost data if you can get your hands on such contracts.

Answer 46

Construction contracts for similar properties

Question 47

You may be able to obtain construction contracts for similar properties from

Answer 47

real estate agents, lenders, or other appraisers.

Question 48

Every time you do an appraisal for a proposed construction, try to get a hold of and keep a _____ of the construction contract

Answer 48

copy

Question 49

Who's the first person you should ask about building costs?

Answer 49

the builder

Question 50

These people are sources you must pay in order to obtain cost data

Answer 50

professional cost estimators

Question 51

These services are not always 100% reliable, but they are probably the most commonly-utilized source of cost data for appraisers. There are several national ones.

Answer 51

Cost estimating services

Question 52

The major cost estimating services are:

Answer 52

Marshall & Swift www.marshallswift.com RS Means Company, Inc. www.rsmeans.com

Question 53

The most popular cost service among residential appraisers.

Answer 53

Marshall and Swift

Question 54

Whatever the source of the cost data, all cost estimates to be used in the cost approach need to include three basic ingredients:

Answer 54

Direct costs Indirect costs Entrepreneurial incentive

Question 55

Expenditures for the labor and materials used in the construction of improvements; also called hard costs

Answer 55

Direct costs

Question 56

Expenditures or allowances for items other than labor and materials that are necessary for construction, but are not typically part of the construction contract. Indirect costs may include administrative costs; professional fees; financing costs and the interest paid on construction loans; taxes and the builder's or developer's all-risk insurance during construction; and marketing, sales, and lease-up costs incurred to achieve occupancy or sale. Also called soft costs.

Answer 56

Indirect costs

Question 57

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.

Answer 57

Entrepreneurial Incentive

Question 58

Examples of tangible, hard direct costs:

Answer 58

Building permits Materials used to construct buildings Labor used to construct buildings

Question 59

Examples of intangible, indirect costs

Answer 59

Architectural and engineering fees Appraisal, accounting and legal fees Cost of carrying the investment (e.g., construction loans) Property insurance and taxes during construction

Question 60

Entrepreneurial incentive is what a contractor or developer ______ to get; entrepreneurial profit is what they ________ get.

Answer 60

hopes; actually

Question 61

Entrepreneurial incentive/ profit may be estimated as a percentage of:

Answer 61

Direct costs only Direct and indirect costs Direct and indirect costs plus site value The value of the completed project

Question 62

Cost services include direct and indirect costs in their cost figures - but NOT

Answer 62

entrepreneurial profits or incentives!

Question 63

Most fire and casualty insurance policies are based on the ____________ cost of a structure. reproduction replacement opportunity original

Answer 63

replacement

Question 64

Which of the following are the two major cost estimating services? JD Power and R.L. Polka R.L. Polka and Marshall & Swift Marshall & Swift and RS Means Company, Inc. RS Means Company, Inc. and JD Power

Answer 64

Marshall & Swift and RS Means Company, Inc.

Question 65

When ____________ cost is used, it eliminates any functional obsolescence that may be present in the structure. reproduction replacement book opportunity

Answer 65

replacement

Question 66

Direct costs are also called soft costs hard costs entrepreneurial costs opportunity cost

Answer 66

hard costs

Question 67

There are three traditional cost estimating methods. They vary in degree of difficulty and accuracy. They include the following:

Answer 67

Comparative-unit method Unit-in-place method Quantity survey method

Question 68

If you know what the original cost of construction was for a building at some time in the past, it is possible through the use of special pages in cost services to apply a multiplier to bring it up to a present cost. in this limited situtation, which cost estimating method would you use?

Answer 68

the Index method

Question 69

Using an index, you can calculate that a quart of milk that cost 10 cents at the time when it was delivered to your door now costs $1.48 from a store. Well, you can also use the same principle to find out what a house that cost $125,000 to construct in 1980 would cost today. This is an example of:

Answer 69

The index method

Question 70

The contract cost for constructing a house in January 1996 was $324,500. The index for January 1996 was 212.6 and the current index is 306.4. 306.4 / 212.6 = 1.441. This converts to a percentage as 144.1%. Subtracting the 100% from the 144.1%, leaves 44.1% increase. This means the costs have increased 44.1%. $324,500 X 1.441 = $467,605 What is this an example of?

Answer 70

Cost index

Question 71

A house contains 2,826 square feet. It was constructed in 1995 at a cost of $54.18 per SF. The cost index at that time was 193.4. The cost index today is 286.3. What is the estimated cost to build the building today?

Answer 71

$226,607. 2,826 SF X $54.18 = $153,113 286.3 / 193.4 = 1.480 $153,113 x 1.480 = $226,607 Therefore, costs have gone up 48% since 1995, and it would cost $226,607 to build the same house today.

Question 72

This is the first of the three traditional cost estimating methods. It is the simplest, quickest, least complicated, and least accurate method of estimating costs. It is the one that is used primarily by appraisers. Costs are expressed in terms of dollars per unit of area or volume.

Answer 72

Comparative-Unit Method

Question 73

The steps of the comparative unit method:

Answer 73

Select sales of recently constructed buildings that are similar to the subject property and represent the highest and best use of the site Subtract the value of the site and site improvements from the sales price to arrive at the cost new of the improvements (including entrepreneurial incentive) Make adjustments for physical differences between the subject and the sale properties Divide the adjusted cost new by the desired unit of area or volume to arrive at the cost per unit Adjust the unit cost for market conditions, if necessary Apply the unit costs to the subject property

Question 74

You find a comparable sale of a new house similar to the one you are appraising. It just sold for $320,000. You estimate the value of the site at $75,000 and the cost of the site improvements at $15,000. $320,000 - $75,000 -$15,000 = $230,000. The house has 2,550 square feet (SF) of gross living area (GLA). What is the unit cost of the structure?

Answer 74

$90.20 All you have to do is divide $230,000 by 2,550 and the answer is $90.20. That is a market-derived comparative unit cost.

Question 75

If your subject property has 2,475 SF, what should it cost to build? 2,475 x $90.20 = $223,245. That works well when the houses are about the same size. We will see later that the costs vary according to the size of the structure. Okay, let's do a quick cost approach for our subject property. Your research shows the land is worth $65,000 and you project the site improvements will cost $12,000. When completed, it will be brand new with no depreciation.

Answer 75

$223,245 - 0 + $65,000 + $12,000 = $300,245, rounded to $300,000.

Question 76

A _____ _____ figure may be developed from cost services, such as Marshall & Swift. The same process applies, with adjustments made for differences from the benchmark structure and modifications for time and location of the subject.

Answer 76

unit cost

Question 77

Tue or false: building costs vary from area to area

Answer 77

true

Question 78

The easiest shape to construct is a _____ with __ corners

Answer 78

square; 4

Question 79

The more corners you construct for a house, the more ________ it will be

Answer 79

expensive

Question 80

In this method, total building cost is estimated by adding together the unit costs for the various building components. Sometimes it is called the segregated cost method.

Answer 80

Unit-in-place method

Question 81

Costs are computed based on the quantity of materials used plus the labor involved in assembly. For example, costs could be estimated per square foot of floor area or lineal foot of wall area. For example, we might determine that the cost per lineal foot of exterior wall is $106.28. This is an example of the

Answer 81

unit-in-place method

Question 82

This means running along the ground.

Answer 82

lineal foot

Question 83

In this `method, the quantity and quality of all materials used and all categories of labor required are estimated, and unit cost figures are applied. The most comprehensive and accurate method

Answer 83

Quantity Survey Method

Question 84

Of the traditional methods of cost estimating, the least complicated and least accurate method is the _________ method. comparative-unit quantity survey unit-in-place

Answer 84

comparative-unit

Question 85

When using Marshall & Swift, adjustments need to be made for construction costs in various locations of the country. This is accomplished through use of quantity surveys local multipliers subjective guessing entrepreneurial factors

Answer 85

local multipliers

Question 86

A home was constructed in June 2009 at a cost of $195,000. The index for June 2009 was 188.2 and the current index is 218.3. What is the cost to construct the home today? (When dividing the indices, round to two decimal places)

Answer 86

$226,200 218.3/188.2 = 1.16 1.16 x 195,000 = 226,187 round two decimal places 226,200

Question 87

The unit-in-place method is sometimes called the ____________ method. segregated cost quantity survey comparative survey reproduction cost

Answer 87

segregated cost

Question 88

``` The cost approach has good applicability when the improvements we are appraising are _________________. old old, but remodeled new or relatively new historic ```

Answer 88

new or relatively new

Question 89

``` The oldest of the three traditional appraisal approaches is the _________ approach. cost income capitalization sales comparison market ```

Answer 89

cost

Question 90

Contractor’s overhead and profit is an example of ____________ cost. direct indirect capital none of the above

Answer 90

direct

Question 91

"A loss in value from any cause" is the definition of what appraisal term? Decline Depreciation Decreasing returns Opportunity cost

Answer 91

depreciation

Question 92

``` Appraisal, accounting and legal fees are examples of ____________ costs. direct indirect entrepreneurial capital ```

Answer 92

indirect

Question 93

All of the following are situations where the cost approach has good applicability, EXCEPT for - the land value is well supported - the improvements do not represent the highest and best use of the land as if vacant - the improvements represent the highest and best use of the land as though vacant. - estimating the use value of special purpose properties

Answer 93

the improvements do not represent the highest and best use of the land as if vacant

Question 94

Unless adjustments are made for ownership interest, the cost approach will indicate the value of the ___________ interest. leased fee leasehold fee simple partial

Answer 94

fee simple

Question 95

The basic principle underlying the cost approach is the principle of ___________. anticipation contribution substitution externalities

Answer 95

subsitution

Question 96

A house contains 2,312 square feet. It was constructed in 2009 at a cost of $72.32 per SF. The cost index at that time was 201.4 and the cost index today is 265.8. What is the estimated cost to build the building today? (Round the index to 2 decimal places)

Answer 96

$220,709

Question 97

The most popular cost service among residential appraisers is Adobe Acrobat Apex Marshall & Swift Alamode

Answer 97

Marshall & Swift

Question 98

An example of a special purpose property is a ____________. 5,000 acre ranch geodesic dome house school building 8,000 square foot residence

Answer 98

school building

Question 99

The cost to produce “an exact duplicate or replica of the building being appraised” is called _____________ cost. reproduction replacement reproducible insurable

Answer 99

reproduction