Cost approach Basic idea is that an informed buyer won’t pay more than the cost of constructing an equal, substitute property minus the depreciation and assuming no delay. Market data is used to value the components of the subject property including the land. The mixing the cost approach and the sales approach is not correct; the cost approach uses a different methodology.

Cost approach Most applicable when: – Improvements are new and are highest and best use – Subject property has characteristics typical in the area – Subject property is a special use property – Enough data to value the property components but limited data to value the whole property

Cost approach Least applicable when: – No vacant land sales available – Construction costs are hard to measure – Depreciation is hard to measure – Improvements are very old

Cost approach Outline – Develop a land value opinion; vacant land in highest and best use valued as highest and best use regardless of present use. Use similar highest and best use – Estimate reproduction or replacement costs for improvements. – Estimate amount of depreciation – Subtract the depreciation from the cost estimate – Total the land and building components

Format New cost of improvements$300,000 Depreciation -175,000 Depreciated value of improvements$125,000 Value of the land$600,000 Value from Cost Approach$725,000

Land in the cost approach Land value is the value for vacant land Unimproved is land without building or structures – Urban usually means land without a house/structure even if there are roads, sewer, etc. – Rural unimproved doesn’t mean there aren’t fences, tile, ponds, etc. Just that there are no buildings or structures. – Why?

Example Subject property has 160 acres of pasture with fences and stock pond Three other sales are located for $800 an acre all with similar fencing and water The indicated value of $800 would include the fence and water If an appraiser valued the land at $800 and then added the value of the fence and water they’d be overstating If the request was for an appraisal that valued them separately then the other 3 sales would have to be allocated between the land and site improvements

Land The Cost approach inventories the land for the subject property into various classes – Cropland, tillable pasture, permanent pasture, woodland, farmstead roads, ditches, etc. Vacant sales are then used to estimate the values for the various classes of land on the subject property Values are applied similar to the subject WITHOUT making the plus or minus adjustments that we used in the Sales comparison approach (except be sure you still make the time adjustments)

Example Tillable ground: – 90 + CSRCropland A – 85 – 90 CSRCropland B – 50 acres of Cropland A$8,000/ac$400,000 – 75 acres of Cropland B 7, ,000 Total tillable$962,000 – 15 acres of pasture$1,050$ 15,750 – 5 acres of farmstead $8,000 $ 40,000 – 2 acres of roads/ditches 0 0 – 22 acres Total non-tillable$2,534 $ 55,750 – 147 acres$6,923 $1,017,750

Sales analysis Assume we have identified 4 unimproved sales with similar location, -12% annual decline Sale 1 Sale 2 Sale 3 Sale 4 DateCurrent 1 yr Current 2yrs Price$160, , , ,000 Land100 crop 85 crop 100 crop 50 crop 0 past. 20 past20 past 50 past. Time adjust , $35,193 Adjusted price $160, , , ,807 Per acre$1,600 $1,452 $1,469 $1,208

Analysis Sales 2 – Adjusted price$152,460 – 85 acres crop $1,600/ac 136,000 – $ 16,460 – 20 acres past ?/ac $823 $16,460 – Check 136, ,460 = 152,460

Analysis Sales 3 – Adjusted Price$176, ac. Crop $1,600/ac 160,000 $ 16, ac. Past. ?/ac. $813 $16,250 Check

What is the value of pasture in Sales 4?

Adjusted price$120, acrescrop 50 acres pasture

Analysis Sales 4 – Adjusted price$120,806 – 50 acres crop $1,600/ac 80,000 – $ 40,806 – 50 acres past ?/ac $816 $40,806 – Check 80, ,806 = $120,806

Analysis Subject – 75 acres crop $1,600/ac $120,000 – 25 acres Pasture $815 20,375 $140,375

Cost approaches Depreciation difference between the cost to reproduce or replace property and its contributory value as of the date of the appraisal Physical deterioration; Functional obsolescence Defects in design; material, design, otherwise obsolete by current standards Sometimes this could be cured External obsolescence; effect on value from outside property itself; traffic, odor, hazards, etc.