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The Cost Approach
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Relation to Appraisal Principles
Substitution Supply and demand Balance Externalities Highest and best use Stabilization Chapter 27
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Applicability and Limitations
Often seen as the highest price that market participants would pay Most applicable when improvements are new and land value is well established Less applicable to older properties and properties for which the effect of functional problems on value is hard to support Chapter 27
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Procedure Land value Reproduction cost versus replacement cost
Cost estimates Direct costs – usually in the builder’s contract to build Indirect costs – costs outside the building contract but still part of the cost of construction Entrepreneurial incentive and entrepreneurial profit Chapter 27
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Procedure, continued Depreciation
Physical deterioration – caused by wear and tear or the passage of time Functional obsolescence – usually the result of the property no longer conforming to a market requirement or not in compliance with highest and best use External obsolescence – caused by factors outside the property Depreciation in appraising and accounting Chapter 27
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Cost Approach Procedure Example
Chapter 27
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