Module07 - Outline

Module07 - Outline - Module 7 The Cost Approach Objectives...

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Module 7 – The Cost Approach Objectives 11.1 Use of Cost Estimates in Appraisals 11.2 Practical Cost-Estimating Methods 11.3 Understanding Direct and Indirect Costs 11.4 Important Factors Affecting Building Cost 12.1 Depreciation Defined 12.2 Types and Causes of Accrued Depreciation 12.3 Methods of Measuring Accrued Depreciation 12.4 Cost Approach Summary 11.1 USE OF COST ESTIMATES IN APPRAISALS 1. The cost approach is based on the principle of substitution. 2. Cost estimates are used in all three approaches to value. 3. The cost estimates that are used in appraisals should always reflect: a. Cost levels at the date of value, not “book” costs or historic costs. b. Typical costs rather than the actual construction costs. c. Costs that include all charges to the consumer. Purpose and Outline of the Cost Approach Three main purposes of the cost approach: 1. To estimate the value of new or nearly new buildings or developments. 2. To appraise institutional or special-use properties. 3. To serve as a check against the other value approaches used. Steps in the Cost Approach The cost approach involves five basic steps: 1. Estimate the value of the land as if vacant. 2. Estimate the cost to reproduce or replace the improvements. 3. Estimate accrued depreciation (loss in value). 4. Deduct the accrued depreciation from the cost (as new) of improvements. 5. Add the land value to the depreciated cost of improvements. Limitations on Using the Cost Approach 1. Some cost elements are difficult to define and to estimate. 2. Measuring accrued depreciation can be difficult and subjective. 3. The cost approach is not reliable in the appraisal of older buildings. The Choice of Reproduction or Replacement Costs 1. Reproduction cost is the cost of creating a duplicate building. 2. Replacement cost is the cost of a building with similar utility. 3. The difference in the two costs is important, as it changes the depreciation. Using Reproduction Cost Estimates 1. All physical components are included in the cost estimate, even if out of style. 2. Judgment of utility is not made until depreciation is calculated. Using Replacement Cost Estimates
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1. Replacement cost estimates require a judgment of utility, attractiveness, function, and marketability of the improvements. 2. Components to be excluded from a replacement cost estimate would be: a. Building materials that are out-dated. b. Features that are no longer in current demand at that location. Replacement versus Reproduction 1. Replacement cost estimates are: a. Less time-consuming to estimate. b. More closely related to market demand. 2. Reproduction costs are often preferred in formal appraisal reports (including the Uniform Residential Appraisal Report) because: a. They reflect the actual features of the structure.
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This note was uploaded on 09/17/2011 for the course CGS 3300 taught by Professor Kaleem during the Spring '08 term at FIU.

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Module07 - Outline - Module 7 The Cost Approach Objectives...

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