The Cost Approach

1. The Cost Approach Reproduction/Replacement Cost Reproduction or – Depreciation on + Site = Property Replacement Cost Improvements Value Value of Improvements Cost approach formula: Basic value principle is substitution

2. Reproduction Cost Vs Replacement Cost Reproduction cost is $$ required to construct an exact duplicate of the subject improvements at prices current as of the effective appraisal date Replacement cost is current cost of improvements having the same utility

3. Finding Replacement Cost • Index method Factor representing percentage change in construction costs from date of construction to effective date of appraisal is applied to original cost ______Present Index_______ X Original = Present Index at Time of Construction Cost Cost

4. Square-foot method Cost per square foot of recently built structure that is comparable to the subject is multiplied by number of square feet in subject structure Commonly used for residential appraisals as check on sales comparison approach Cost manuals provide typical construction costs for structures of defined specifications and regional factors to account for local differences. boeckh.com fwdodge.com marshallswift.com rsmeans.com

5. Unit-in-Place Method Costs of various components of subject are estimated separately, then totaled to find current construction cost Residentialbuilding costs typically include: foundation interior construction floor structure heating/cooling system floor covering electrical system exterior walls plumbing gable roof fireplace(s) ceiling appliances roof structure/ stairway covering/dormers

6. Quantity survey method Complete itemization of all costs expected in building construction Direct costs are materials and labor Indirect costs include expenses other than materials and labor, such as: surveys, building permit, payroll taxes, insurance, builder’s overhead and profit, entrepreneurial profit

7. Depreciation! Depreciation is any loss in value from original construction cost Accrued depreciation is total depreciation due to all causes from time of construction to the date of appraisal

8. Categories of Depreciation • Physical deterioration Caused by wear-and-tear and action of the elements, and is usually the most obvious form of depreciation Curable when repairs result in equal or greater increase in overall property value Incurable when repairs cannot be made economically

9. Functional obsolescence Caused by presence of currently undesirable layout, design or other features, or absence of currently desirable features Curable if alteration can be made economically Incurable if alteration not practical

10. External obsolescence is also called environmental obsolescence, economic obsolescence, or locational obsolescence It is any loss of value from causes outside the property itself and is always considered incurable. Examples: changes in land use or natural conditions change in business environment loss of jobs due to layoffs or closures

11. The Americans with Disabilities Act All new and remodeled places of public accommodation must be made accessible to persons with a disability. Americans with Disabilities Act Accessibility Guidelines for Buildings and Facilities (ADAAG) by Architectural and Transportation Barriers Compliance Board Enforced by U.S. Department of Justice doj.gov

12. Methods of Computing Depreciation • Age-Life Method Also called straight-line method or economic age-life method Based on assumption that depreciation occurs at an even rate throughout the projected life of of a structure. Normally based on effective age of structure rather than actual age in years.

13. Formula for age-life method Effective Total Accrued Age ÷ Economic = Depreciation Life

14. Observed condition method Also known as breakdown method Appraiser estimates loss in value for curable and incurable items Physical deterioration—curable Physical deterioration—incurable Functional obsolescence—curable Functional obsolescence—incurable

15. Capitalized value method Also called rent loss method Appraiser determines loss of income due to depreciation by comparison to comparable properties, then applies capitalization rate to the loss of income to determine effect on property value.

16. Sales comparison method Also called market comparison method or market extraction method Appraiser analyzes comparable sales from which depreciation can be drawn 1. Land value of comp is subtracted from comp’s sales price to find depreciated value of improvements 2. Depreciated value is subtracted from reproduction cost of improvements to find dollar amount of depreciation 3. Dollar amount of depreciation is divided by age of improvements to find depreciation rate 4. If consistent over comps, appraiser applies percent of depreciation to reproduction cost of improvements to find dollar amount of depreciation for subject property

17. Itemizing Accrued Depreciation Compute amount of depreciation for items below, then compute loss due to depreciation from home if estimated replacement cost is $247,000.

18. Depreciated value of home is $237,900 ($247,000 - $9,100 accrued depreciation)