cost approach Flashcards
(24 cards)
the total amount of depreciation that has occurred on an asset up to a specific date.
accured depreciation
what is the difference between reproduction cost and replacement cost
Reproduction cost aims to determine the cost of creating an exact replica of the asset, using the same materials, techniques, and designs as the original. Replacement cost, on the other hand, focuses on the cost of replacing the asset with a new one of comparable utility, using current materials and construction methods.
what are the Four Methods to Finding the Reproduction Cost of a Structure
Index method
Square-foot method
Unit-in-place method
Quantity survey method
With this method, the appraiser applies a factor that represents the construction costs, up to the appraisal date, to the subject building’s original cost.
Index method
Present index ÷ index at time of construction x original cost = present cost
With this method, the appraiser multiplies the cost per square foot of a recently constructed comparable structure by the number of square feet in the subject building. Generally, this method is the one appraisers use to estimate construction costs.
square foot method
(Gross living area x cost per square foot) + cost of the non-living areas + cost of improvements = Reproduction cost new
With this method, the appraiser multiplies the cost per unit of measure of each component part of the subject property’s structure (for example, the material, overhead, labor, and builder’s profit) by the number of units of that component part in the subject. The total component cost is the cost of a new structure.
Unit-in-place method
With this method, the appraiser adds the itemized costs—including direct and indirect expenses—of building or installing all of a new structure’s component parts.
Quantity survey method
Direct costs + indirect costs + entrepreneurial profit = total reproduction cost new
what are the sections of URAR in order
Subject section (property description)
Neighborhood section (neighborhood & PUD)
Site section
Sales Comparison Approach section (value) Reconciliation section (Final Determination)
Appraiser and Supervisory Appraiser area (signature)
The next item on the form is the estimated remaining economic life of the property. When is Melody required to provide this information?
For a property that’s being purchased by a buyer who’s applied for a HUD or VA loan
Do you recall what two things an appraiser calculates when using the square-foot method to determine the reproduction cost?
The cost per square foot of a recently constructed comparable structure
The number of square feet in the subject building
What is a regional multiplier?
An example that can be used anywhere in the country, as long as the cost estimate is multiplied by that region’s adjustment factor
What are the three primary categories of depreciation?
Physical deterioration
Functional obsolescence
External obsolescence
How do appraisers determine if something is “incurable”?
The cost to cure a problem is more than it will recoup in property value.
The period of time for which a structure can be used for the purpose for which it was originally intended; also known as useful life.
economic life
The amount of time during which the structure is expected to remain standing.
physical life
The age a structure appears to be. This can be higher or lower than the structure’s chronological age, depending on the quality of its original construction, and the care and updates it’s received since then.
effective age
The period of time beginning from the date of the appraisal and extending for as long as the property can remain useful for its original purpose; in terms of an appraisal, a property’s remaining economic life is the most important of these four measures of time.
remaining economic life
The indicated value by the cost approach is found by taking the following steps, in this order:
First, the appraiser estimates the existing structure’s reproduction or replacement cost.
Second, the appraiser subtracts any depreciation loss from the estimated reproduction/replacement cost.
Third, the appraiser adds an estimate of the value for the site (as if it were vacant and might be developed to its highest and best use) to the depreciation cost estimate.
the formula for estimating depreciation using the age-life method:
Effective age ÷ Total economic life = Accrued depreciation
What are the most common methods appraisers use to measure depreciation?
Market extraction
Observed condition
Capitalized value
Age-life
Compares the structure’s effective age at the time it’s appraised with the structure’s total economic life to measure depreciation
age life method
Effective age ÷ total economic life = accrued depreciation
Estimates the property’s loss in value for both curable and incurable items of depreciation
observed condition method
Applies a capitalization rate to an income comparison of similar properties
capitalized value method
Uses comparable properties’ sales prices to figure out the value of a depreciated item
market exraction method
