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Unformatted text preview: ss depreciation on improvements, is added to site value. Dynasty School (www.dynastySchool.com) 12-5 REAL ESTATE FINANCE
In the cost approach, the appraiser estimates the value of any improvements to the land (such as structures) in terms of their reproduction or replacement cost as though new. The appraiser then subtracts any loss in value owing to the depreciation of the improvements. Finally, the appraiser adds an estimate of the value of the site itself, usually found by the sales comparison approach. The formula for the cost approach is: Property Value = Reproduction or Replacement Cost of Improvements – Depreciation Improvement(s) + Site Value
Depreciation may occur through either deterioration (effects of wear and tear or the elements) or obsolescence. Obsolescence can be functional, such as outmoded room layout or design, or external, caused by changes in factors outside the property such as zoning, the property’s highest and best use, or supply and demand. Example:
A house being appraised is similar in size, design, and quality of construction to a new house that has a construction cost of $125,000. The house being appraised has depreciated by 20 percent due to lack of maintenance and is on a lot valued separately at $35,000. Using the cost approach formula: Depreciation: 20% x $125,000 Property Value = $125,000– $25,000 + $35,000 = $135,000 The estimated value of the property based on the cost approach is $135,000. Example:
A warehouse that would cost $350,000 to construct today has depreciated 25 percent in its lifetime and is on land valued at $11 0,000. What is the property’s total estimated value by the cost approach? Property Value = $350,000 – ($350,000 x 25%) + $110,000 $350,000 – $87,500 + $110,000 = $372,500 The estimated value of the property based on the cost approach is $372,500. 12-6 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 12: QUALIFYING THE PROPERTY
METHODS OF COST ESTIMATION
In this approach to appraisal, value is estimated and analyz...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10