Ch.5 Cost Approach - Cost Estimating Exam
The four methods of estimating the ____________________/______________________ cost of a
structure will be demonstrated with examples. They include:
Index method
Comparative-unit method
Unit-in-place method
Quantity survey method
reproduction, replacement
The basic principle underlying the ________ approach is the principle of __________________
cost, substitution
the principle of _______________________: "The appraisal principle that states that when several
similar or commensurate commodities, goods, or services are available, the one with the lowest price
will attract the greatest demand and widest distribution. This is the primary principle upon which the
cost and sales comparison approaches are based."
substitution
The principle of substitution really underlies all _________ approaches to ___________.
three value
In the ____________ comparison approach, it asks the question, "Why should I pay more than
$200,000 for your property, when I can buy another one just as ________ for $200,000?"
sales, good
In the ______________ approach it begs the question, "Why should I pay more than $200,000 for
your property, when I can buy another one for $200,000 that has an economic ____________ just as
good?"
income, return
The principle of ________________ triggers this question in the _________ approach, "Why should I
pay more than $200,000 for your property, when I can __________ another one just as good for
$200,000?"
substitution, cost, build
In the _________ comparison approach, it asks the question, "Why should I pay more than $200,000
for your property, when I can buy another one just as __________ for $200,000?"
In the _____________ approach it begs the question, "Why should I pay more than $200,000 for your
property, when I can buy another one for $200,000 that has an economic ____________ just as
good?"
The principle of substitution triggers this question in the ______ approach, "Why should I pay more
than $200,000 for your property, when I can _________ another one just as good for $200,000?"
sales, good, income, return, cost, build
True or False?
,Buyers do shop around and compare properties. Some sellers correlate cost with value.
True
The basic formula for the __________ approach:
Reproduction or Replacement Cost New
- Accrued ____________________
+ _______ Value
= Property ________
cost, Depreciation, Site, Value
__________ Approach Example using the basic formula: A house cost $200,000 to build new. It is 10
years old and has sustained a total of 15% depreciation. It sits on a lot worth $40,000. What is its
value by the cost approach?
Cost New $200,000
- Accrued Depreciation ($200,000x.15) - $30,000
$170,000
+ Site Value + $ 40,000
Indicated Value by Cost Approach $210,000
Cost
Once you have those ________ numbers (cost, new depreciation, and site value) anybody can process
the results by adding and subtracting.
three
Where you will earn your ____________ as an appraiser is in researching, analyzing and reconciling
your way to the right three numbers.
stripes
The _________ approach is defined as:
"A set of procedures through which a value indication is derived for the fee simple estate by
estimating the current cost to construct a reproduction of (or replacement for) the existing structure,
including an entrepreneurial incentive or profit, deducting depreciation from the total cost, and
adding the estimated land value. Adjustments may then be made to the indicated value of the fee
simple estate in the subject property to reflect the value of the property interest being appraised."
cost
The cost approach definition that is found in the International Valuation Standards (_______) Glossary
says: one of the approaches to value commonly applied in _____________ Value estimates and many
other valuation situations
IVS, Market
______ ___________ ___________ is defined as
, "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations
imposed by the governmental powers of taxation, eminent domain, police power, and escheat."
The definition of cost approach on the previous page stated that the cost approach is used to
estimate the value of a fee simple interest, and it can also be used for other types of ownership
interests if appropriate adjustments are made.
As we may remember from Basic Appraisal Principles, a fee simple interest is still subject to the
normal public limitations on ownership. For example, you may own a property free and clear of all
encumbrances, no mortgage and with a warranty deed - however, if you fail to pay your taxes, the
property can be taken by the taxing municipality.
Fee simple interest
_________________________ Cost is defined as
"The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact
duplicate or replica of the building being appraised, using the same materials, construction standards,
design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and
obsolescence of the subject building."
A similar definition for reproduction cost exists in the IVS Glossary, that states:
"The cost to create a virtual replica of the existing structure, employing the same design and similar
building materials. The current cost of an identical new item."
Reproduction
______________________ Cost is defined as
"The estimated cost to construct, at current prices as of the effective appraisal date, a building with
utility equivalent to the building being appraised, using modern materials and current standards,
design and layout."
Replacement
Replacement cost is defined in the ________ Glossary as:
"The estimated cost to construct, at current prices as of a specific date, a substitute for a building or
other improvements, using modern materials and current standards, design, and layout."
IVS
Reminder: IVS stands for:
International Valuation Standards
________________________ ________________ is defined as
"The amount an entrepreneur expects to receive for his or her contribution to a project.
Entrepreneurial incentive may be distinguished from entrepreneurial profit (often called developer's
profit) in that it is the expectation of future profit as opposed to the profit actually earned on a
development or improvement. The amount of entrepreneurial incentive required for a project
represents the economic reward sufficient to motivate an entrepreneur to accept the risk of the
project and to invest the time and money necessary in seeing the project through to completion."
The four methods of estimating the ____________________/______________________ cost of a
structure will be demonstrated with examples. They include:
Index method
Comparative-unit method
Unit-in-place method
Quantity survey method
reproduction, replacement
The basic principle underlying the ________ approach is the principle of __________________
cost, substitution
the principle of _______________________: "The appraisal principle that states that when several
similar or commensurate commodities, goods, or services are available, the one with the lowest price
will attract the greatest demand and widest distribution. This is the primary principle upon which the
cost and sales comparison approaches are based."
substitution
The principle of substitution really underlies all _________ approaches to ___________.
three value
In the ____________ comparison approach, it asks the question, "Why should I pay more than
$200,000 for your property, when I can buy another one just as ________ for $200,000?"
sales, good
In the ______________ approach it begs the question, "Why should I pay more than $200,000 for
your property, when I can buy another one for $200,000 that has an economic ____________ just as
good?"
income, return
The principle of ________________ triggers this question in the _________ approach, "Why should I
pay more than $200,000 for your property, when I can __________ another one just as good for
$200,000?"
substitution, cost, build
In the _________ comparison approach, it asks the question, "Why should I pay more than $200,000
for your property, when I can buy another one just as __________ for $200,000?"
In the _____________ approach it begs the question, "Why should I pay more than $200,000 for your
property, when I can buy another one for $200,000 that has an economic ____________ just as
good?"
The principle of substitution triggers this question in the ______ approach, "Why should I pay more
than $200,000 for your property, when I can _________ another one just as good for $200,000?"
sales, good, income, return, cost, build
True or False?
,Buyers do shop around and compare properties. Some sellers correlate cost with value.
True
The basic formula for the __________ approach:
Reproduction or Replacement Cost New
- Accrued ____________________
+ _______ Value
= Property ________
cost, Depreciation, Site, Value
__________ Approach Example using the basic formula: A house cost $200,000 to build new. It is 10
years old and has sustained a total of 15% depreciation. It sits on a lot worth $40,000. What is its
value by the cost approach?
Cost New $200,000
- Accrued Depreciation ($200,000x.15) - $30,000
$170,000
+ Site Value + $ 40,000
Indicated Value by Cost Approach $210,000
Cost
Once you have those ________ numbers (cost, new depreciation, and site value) anybody can process
the results by adding and subtracting.
three
Where you will earn your ____________ as an appraiser is in researching, analyzing and reconciling
your way to the right three numbers.
stripes
The _________ approach is defined as:
"A set of procedures through which a value indication is derived for the fee simple estate by
estimating the current cost to construct a reproduction of (or replacement for) the existing structure,
including an entrepreneurial incentive or profit, deducting depreciation from the total cost, and
adding the estimated land value. Adjustments may then be made to the indicated value of the fee
simple estate in the subject property to reflect the value of the property interest being appraised."
cost
The cost approach definition that is found in the International Valuation Standards (_______) Glossary
says: one of the approaches to value commonly applied in _____________ Value estimates and many
other valuation situations
IVS, Market
______ ___________ ___________ is defined as
, "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations
imposed by the governmental powers of taxation, eminent domain, police power, and escheat."
The definition of cost approach on the previous page stated that the cost approach is used to
estimate the value of a fee simple interest, and it can also be used for other types of ownership
interests if appropriate adjustments are made.
As we may remember from Basic Appraisal Principles, a fee simple interest is still subject to the
normal public limitations on ownership. For example, you may own a property free and clear of all
encumbrances, no mortgage and with a warranty deed - however, if you fail to pay your taxes, the
property can be taken by the taxing municipality.
Fee simple interest
_________________________ Cost is defined as
"The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact
duplicate or replica of the building being appraised, using the same materials, construction standards,
design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and
obsolescence of the subject building."
A similar definition for reproduction cost exists in the IVS Glossary, that states:
"The cost to create a virtual replica of the existing structure, employing the same design and similar
building materials. The current cost of an identical new item."
Reproduction
______________________ Cost is defined as
"The estimated cost to construct, at current prices as of the effective appraisal date, a building with
utility equivalent to the building being appraised, using modern materials and current standards,
design and layout."
Replacement
Replacement cost is defined in the ________ Glossary as:
"The estimated cost to construct, at current prices as of a specific date, a substitute for a building or
other improvements, using modern materials and current standards, design, and layout."
IVS
Reminder: IVS stands for:
International Valuation Standards
________________________ ________________ is defined as
"The amount an entrepreneur expects to receive for his or her contribution to a project.
Entrepreneurial incentive may be distinguished from entrepreneurial profit (often called developer's
profit) in that it is the expectation of future profit as opposed to the profit actually earned on a
development or improvement. The amount of entrepreneurial incentive required for a project
represents the economic reward sufficient to motivate an entrepreneur to accept the risk of the
project and to invest the time and money necessary in seeing the project through to completion."
