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

Reproduction Cost Vs Replacement Cost 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

Finding Replacement Cost Index method 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

Square-foot method 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

Unit-in-Place Method Unit-in-Place Method Costs of various components of subject are estimated separately, then totaled to find current construction cost Residential building costs typically include: foundationinterior construction floor structureheating/cooling system floor coveringelectrical system exterior wallsplumbing gable rooffireplace(s) ceilingappliances roof structure/stairway covering/dormers

Quantity survey method 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, builders overhead and profit, entrepreneurial profit

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

Categories of Depreciation Physical deterioration 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

Functional obsolescence 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

External obsolescence is also called 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

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

Methods of Computing Depreciation Age-Life Method Age-Life Method Also called straight-line method or economic age-life 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.

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

Observed condition method Observed condition method Also known as breakdown method Appraiser estimates loss in value for curable and incurable items Physical deteriorationcurable Physical deteriorationincurable Functional obsolescencecurable Functional obsolescenceincurable

Capitalized value method 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.

Sales comparison method 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 comps 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

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. Item Reproduction Cost Percent Depreciation Amount of Depreciation Bath fixtures $1,80075% Carpeting 4, Furnace 2, Roof 5,500 90

Item Reproduction Cost Percent Depreciation Amount of Depreciation Bath fixtures $1,80075%$1,350 Carpeting 4, ,100 Furnace 2, Roof 5, ,950 Depreciated value of home is $237,900 ($247,000 - $9,100 accrued depreciation)