Questions and Answers
What does the Cost Approach Method assume about improved property value?
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?
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What is replacement cost?
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What is reproduction cost?
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Replacement cost estimates are usually lower than reproduction cost estimates.
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What are hard costs?
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What are soft costs?
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What is entrepreneurial profit?
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The cost formula is defined as: Cost = Number of Units x ______
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Match the common cost estimating techniques with their descriptions:
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How is square footage calculated?
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How do you calculate cost per square footage?
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What does unit cost by market analysis involve?
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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.