Cost Approach Flashcards
Cost Approach
General
- estimate costs to reproduce property lessaccrued depreciation
- based on proposition that informed purchaser wouldn’t pay more than cost of producing substitute property with same utility as subject property (substitution)
- suitable for evaluation of special use properties, non-trading properties (e.g. churches, fire deprartments, public buildings, libraries) and for insurance of all properties
Cost Approach Formula
Property Value =
Reproduction or Replacement cost of Improvement(s)
- Accrued Depreciation
- + Site Value
Reproduction Cost
vs.
Replacement Cost
Reproduction:
- - dollar amount required to construct exact duplicate of improvements at current price
**Replacement: **
- dollar amount required to construct improvement of **equal utility **using currently available tech and methods
Drawback of Cost Approach
- cost isn’t market value
- builders’ cost may vary greatly, depending on # of units produced and individual builder’s profit margin
Reliability of Cost Approach is affected by
- reproduction or replacement cost data
- estimate of accrued depreciation
Steps in Cost Approach
- Estimate reproduction or replacement cost of structures on date of appraisal
- Estimate accrued depreciation
- deduct depreciation from cost
- Estimate land value as though vacant
- Add depreciated reproduction or replacement cost to value of land
How to estimate Reproduction / Replacement Cost
3 items
- Index Method
- Square-meter Method
- quantity survey method
Price Index Method
Factors related to real estate market
(Present Index / Index at Time of construction ) x Original Cost = Present Cost
accounting for inflation
Square - meter Method
Estimate Reproduction / Replacement COst
Total Costs = (cost / m2 of recently built comparable structre) x (m2 in subject property)
Quantity Survey Method
Reproduction / Replacement Cost
*Construction Costs = direct + indirect costs *
direct costs: materials + labour
indirect costs: not constr. related expenses, e.g. surveys, payrol taxes and profit
Depreciation and Accrued Depreciation
- any loss in value from original construction crost
- accrued depreciation is total depreciation due to all causes from time of construction to appraisal date
3 categories of depreciation:
- physicla deterioration
-** functional obsolescence** [purpose of building is not desirable any more bc of certain features e.g. lack of AirCon or green building certifiacte]
- external obsolescence [location e.g. Detroit city center abandoned by corporations]
Curable Item
Depreciation
Curable Item
- can be easily and economically restored or replaced, resulting in immediate increase in appraised value
- physical deterioration: window, fixtures, appliances
- Functional Deterioration: outmoded plumbing fixtures, room function such as light
Incurable Item
- impossible, too expensive ro not cost-effective to replace
- Physical deterioration: roof, foundation, electoral system
- Functional obsolescence: undesirable physical or design features
- External obsolescence: new airport, a depressed real estate
market
Further Factors influencing Depreciation
**1. economic life (useful life): **
- period during which it will be functionally useful for its original intended purpose unlike physical life
2. effective age:
- reflects quality of construction and degree of maintenance it has received]
3. remaining economic life:
- remaining time based on original intended use
Economic Age-life Method
(linear depreciation method)
- calculate depreciation
- based on assumption that only form of depreciation is physical deterioriation, which occurs at an even rate throughtou economic life of structure
**1 / # of years of economic life **
