Cost Approach to Value Flashcards

Questions and Answers

What does the Cost Approach Method assume about improved property value?

It considers the value of the site plus construction costs of new improvements minus any depreciation. (correct)

It is based solely on the cost of new improvements.

It relies entirely on market comparison.

It does not consider depreciation.

What is depreciation in the context of the Cost Approach?

The difference in value between the cost of new improvements and their current value.

What are the three separate steps required to determine property value by cost approach?

Estimating reproduction or replacement cost of improvements, estimating depreciation, estimating the value of the land.

Which type of properties is the Cost Approach best suited for?

Service type buildings with few comparables Signup and view all the answers

What is replacement cost?

The cost to build a new substitute improvement at current prices using modern materials and standards. Signup and view all the answers

What is reproduction cost?

Estimating the cost to create an exact replica of the improvements using the same materials and design. Signup and view all the answers

Replacement cost estimates are usually lower than reproduction cost estimates.

True Signup and view all the answers

What are hard costs?

The costs for labor, materials, and equipment used in construction. Signup and view all the answers

What are soft costs?

Indirect costs such as architects' fees, construction loan interest, and property taxes. Signup and view all the answers

What is entrepreneurial profit?

The expected amount that the owner/developer would make from improving the property. Signup and view all the answers

The cost formula is defined as: Cost = Number of Units x ______

Cost per unit Signup and view all the answers

Match the common cost estimating techniques with their descriptions:

Comparative Unit Method = Estimates based on square footage or cubic footage. Unit-in-Place Method = Estimates based on individual building component costs. Quantity Survey Method = Estimates that account for all materials, labor, and overhead. Cost Index Trending = Estimates adjusted for changes in market costs over time. Signup and view all the answers

How is square footage calculated?

By measuring and multiplying the outside dimensions of the building. Signup and view all the answers

How do you calculate cost per square footage?

Multiply the square footage by the estimated cost per square foot. Signup and view all the answers

What does unit cost by market analysis involve?

Gathering data on the sales of comparable new homes similar in size and quality. Signup and view all the answers

Study Notes

Cost Approach to Value

Cost Approach Method: Indicates property value through site value plus new improvement costs, minus depreciation.
Depreciation: Represents the decline in value between new improvement costs and current value; calculated as Value = Cost - Depreciation.
Property Value Calculation: Formula includes reproduction/replacement cost of improvements, depreciation, and separately determined land value.
Process Steps: Involves three steps: estimate improvement costs, determine depreciation, and assess land value.
Best Applications: Ideal for service-type buildings with few comparables and limited income relevance; effective for newer structures.
Replacement Cost: Cost to build a new improvement using modern materials and current standards at appraisal date.
Reproduction Cost: Cost of creating an exact replica using same materials and techniques, accounting for deficiencies and obsolescence.
Cost Comparison: Replacement costs are often lower than reproduction costs due to modern construction efficiencies.
Hard Costs: Direct construction costs including labor, materials, and equipment.
Soft Costs: Indirect expenses like architect fees, interest during construction, and property taxes incurred during development.
Entrepreneurial Profit: Expected earnings for developers from property improvements, typically considered a percentage instead of actual profits.
Cost Calculation Formula: Simplified by the formula: Cost = Number of Units x Cost per Unit.
Common Estimating Techniques: Includes Comparative Unit Method, Unit-in-Place Method, Quantity Survey Method, and Cost Index Trending.
Comparative Unit Method: Estimation based on building area (square or cubic footage); residential estimates primarily use square footage.
Square Footage Calculation: Obtain dimensions by measuring outside edges and multiplying length by width.
Cost per Square Footage: Costs determined by multiplying total square footage by estimated cost per square foot.
Unit Cost by Market Analysis: Involves gathering data on comparable new home sales; requires similarity in size and construction quality to assess site values accurately.

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Description

This quiz focuses on the Cost Approach method for property valuation, covering key definitions and concepts. It explores how property value is determined by site value, new improvement costs, and depreciation. Perfect for students and professionals in real estate valuation.