Day 2: Cost Approach Flashcards Preview

Appraisal Procedures > Day 2: Cost Approach > Flashcards

Flashcards in Day 2: Cost Approach Deck (18):
1

6 Major Components of a Building

1. Foundation
2. Framing (floor and wall supports)
3. Roofing
4. Plumbing
5. Electrical wiring
6. Heating, ventilation and air conditioning

2

6 General Categories of Design for Houses

1. One Story
2. One and a half story
3. Two story (includes 2.5 stories)
4. Split levels (includes multi-level splits
5. Contemporary (those that don’t fit into the prior 4 categories)
6. Specializes (those that don’t fit into prior five categories due to non-traditional design) such as geodesic and earth-sheltered homes

3

3 Types of Foundation

A. Slab foundations
Monolithic slab
Slab on perimeter stem wall

B. Pier foundations

C. Wall foundations
Crawl space
Basement

4

2 Types of Wall Framing

Platform Framing: this is a construction type in which the wall Framing sits on top of the subfloor. Each story is built up as a separate unit.

Balloon Framing: is a construction type in which the studs extend from the sill to the roof. The second floor is supported by a horizontal ribbon or ledger board and joints nailed to studs.

5

CONSTRUCTION AND DESIGN BASICS

As you look at each component, ask- “How does my knowledge of this component affect value in a potential appraisal assignment?” Our focus is Appraisal observation of the structure as it relates to value.

6

APPRAISAL OBSERVATION

A home inspection seeks to discover defective components.

The appraisal observation process seeks to uncover valuation conditions. Appraisers walk the property to observe constructions and design features that affect value.

Appraisers focus on the market’s reaction to readily observable conditions.

7

Footing

A base to put something above it to add stability to the foundation

8

Drain tile

Drain water away from the foundation

9

Flashing

Flashing is a waterproof material used to prevent water leakage in places where it is likely to occur, such as roof valleys or where vent pipes pass through the roof deck and where the roof meets a wall.

10

Stem wall

Slab on perimeter stem wall - it is the stem wall below the earth that extends into the footing.

Stem is below slab level.

11

REVIEW TEST

Colonial style is an example of a two-story design for a residence.

Foundations are sometimes constructed of specially prepared wood and referred to as a permanent wood foundation.

Tighter construction standards since the 1980s have proven to have little or no unfavorable side effects- FALSE

A lender often requires a water test if a property has a private well.

Foundation walls are usually built on footings.

The envelope encompasses everything that separates conditioned air from unconditioned air, including roof or ceiling, foundation, windows, and doors.

12

COST APPROACH- 8 STEPS

1. Estimate improved land as though vacant and available to be put to its highest and best use
2. Estimate direct (labor and materials) and indirect costs (architectural fees, appraiser fees) of the improvements
3. Entrepreneurial incentive (prize for investing)
4. Add steps 2 and 3 together to obtain total current cost
5. Estimate depreciation from three sources
6. Deduct depreciation from total current cost to derive an estimate of the depreciated cost of improvements
7. Add the contributary (as is) value of any site improvements
8. Add the site value to the total depreciated costs.

13

Reproduction cost v. Replacement cost

Reproduction is an exact replica.

Replacement is equivalent in utility to the current improvements. (Most appraisers use replacement costs).

14

Reproduction cost.

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.

15

Replacement 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.

16

“As is” value of improvements

Contributory value of the site that isn’t the building (lawn, landscaping)

17

Four reasons why appraisers must be proficient in cost analysis

1. Cost can be a proxy for value (cost to build, cure, replace).
2. It allows the appriaser to evaluate individual cost components.
3. Cost is often used in the other approaches as a basis of analysis or used as a crosscheck for adjustments.
4. Professional standards require competent analysis - including the appraisers knowledge and application of costs.

18

APPLICABILITY AND LIMITATIONS OF COST APPROACH

Applicability: useful in deriving market value indications and for determining feasibility for proposed construction or relatively new improvements that represent the highest and best use of the improved land or site.

Applicability: useful for limited-market and special-use properties not frequently exchanged in the market.

Applicability: useful for values requiring separation of improved land and improvements.

Applicability: useful when comparable sales or rentals are not available.

Limitation: less reliable for properties with older improvements or improvements that are not the highest and best use of the improved land or site.