Real Estate Valuation: Cost Approach

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Questions and Answers

What is the cost of replacing an existing building with a comparable substitute using modern construction methods called?

Reproduction cost

Indirect cost

Replacement cost (correct)

Development cost

Which term describes features that exceed necessary levels of quality and design?

Superutilities

Overimprovements (correct)

Excess qualities

Deductions

Architect’s fees, permitting costs, and real estate commissions are examples of which type of cost?

Hard costs

Indirect costs (correct)

Direct costs

Depreciated costs

What is the term for physical deterioration that is deemed curable due to wear and tear?

Physical deterioration Signup and view all the answers

Which group primarily uses the quantity survey method?

Contractors or builders collaborating on bids Signup and view all the answers

Which method of estimating depreciation assumes improvements lose value at a steady rate?

Economic age-life method Signup and view all the answers

What is the economic age-life method most appropriate for measuring?

Depreciation caused by external obsolescence Signup and view all the answers

The effective age of a property divided by its economic life is known as what?

Economic age-life ratio Signup and view all the answers

What is the primary cause of depreciation addressed by the economic age-life method?

Economic obsolescence Signup and view all the answers

What term describes the costs that do not directly relate to labor, materials, and equipment during construction?

Indirect costs Signup and view all the answers

Which of the following costs is likely to be considered an indirect cost in construction?

Design fees Signup and view all the answers

What type of depreciation may occur when the design of a property is outdated despite it being originally desirable?

Functional obsolescence Signup and view all the answers

What is the main characteristic of the comparative-unit method?

It sums the costs of components without separate calculation. Signup and view all the answers

Incurable depreciation refers to which situation?

The cost of repair exceeds the value that would be added. Signup and view all the answers

Which type of depreciation is most likely due to a design becoming outdated?

Functional obsolescence Signup and view all the answers

What generally causes external obsolescence?

Changes in neighborhood quality. Signup and view all the answers

Which statement best describes functional obsolescence?

It arises from design features that are no longer desirable. Signup and view all the answers

What does external obsolescence typically reduce?

The marketability of the property. Signup and view all the answers

What is a common misconception about smaller buildings related to costs?

They have lower construction costs per square foot. Signup and view all the answers

What is the primary reason for using a cost index trending method?

To assess the current cost of improvements. Signup and view all the answers

Study Notes

Cost Approach to Value

The cost of replacing an existing building with a comparable substitute building, using modern construction methods and materials, is called reproduction cost.
Superutilities are features that exceed necessary levels of quality and design, and need to be accounted for in reproduction cost estimates.
Examples of indirect costs are architect's fees, permitting costs, and real estate commissions.
The quantity survey method is used by contractors and builders to estimate construction costs. Each component of the building is measured and its cost is multiplied by unit cost.
Curable functional obsolescence results when the cost of repair exceeds the increase in value from making the repair.
Incurable functional obsolescence can be caused by a design defect that was originally desirable but is no longer outdated. It can also be caused by external factors such as environmental hazards.
External obsolescence is caused by factors outside the property boundaries, such as environmental hazards or negative changes in the surrounding neighborhood.
The straight-line depreciation method assumes that improvements lose a constant amount of value each year.
The economic age-life method divides the effective age by the economic life of the property.
When calculating the depreciated cost of improvements, the appraiser adds the value of the land and site improvements to reach the final estimate of value.

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Description

Test your knowledge on the cost approach to property valuation, focusing on concepts such as reproduction cost, indirect costs, and obsolescence. This quiz explores the critical methods used in estimating construction costs and the various types of functional obsolescence. Perfect for real estate students and professionals.