Chapter 11 - The cost approach exam
Main focus of cost approach
Objective value
Subsitution
A prudent buyer will pay no more for a property than the cost of producing or creating an equally
desirable property, providing no delay occurs in making the substitution.
Step 1 of the cost approach
Estimate the value of the site.
Step 2 of the cost approach
Estimate the replacement cost on the effective date of the appraisal. Reproduction cost may be used
in selected
circumstances.
Step 3 of the cost approach
Estimate the accrued depreciation suffered by the improvements from all causes.
Step 4 of the cost approach
Estimate total depreciated cost by subtracting the accrued depreciation from the reproduction cost
new (or replacement cost, if applicable) of the improvements.
Step 5 of the cost approach
Estimate the value of the property by adding the value of the site to the total depreciated cost.
When is cost approach most applicable
when the property involves relatively new
improvements that represent the highest and best use of the land, or when the site possesses unique
or specialized improvements, for which there are no comparable properties on the market.
Objective value
Valuing method used to calculate cost to create
Subjective value
Valuing method used to calculate site value
What types of buildings are ideally suited to this appraisal method
Specialized property where comparables are not available such as schools, churches and industrial
buildings
What age of properties is this method best for
Fairly new properties
, Why does depreciation affect the age of properties this method is best used for
Because of the difficulty of establishing accurate accured depreciation
Reproduction cost
Cost to reproduce an exact replica of the building
Replacement cost
Cost to produce a building with similar utility using current techniques and materials
Comparative sales method—site valuation
This method of estimating site value is based on the most recent sales data available on similar sites,
preferably in the same neighbourhood.
Adjustment elements for comparitive sales method of site evaluation
•rights conveyed by the transaction;
• financing terms;
• motivation of the parties;
• market conditions (time);
• location; and
• physical characteristics.
Abstraction method—site valuation
separate the value of structures and other physical
improvements from the total value of the property to arrive at a site value
What is the Abstraction method of site valuation also know as
Allocation or extraction method
Land residual method—site valuation
Based on the principle of surplus productivity. This principle affirms that the net income remaining
after satisfying the requirements of labour, coordinating
services and capital is attributed to land and sets its value through the capitalization process.
Land Development method—site valuation
This appraisal method is normally applied when the comparative sales method cannot
be used given a lack of comparable sales. This method is a variation on the land residual
method. The appraiser must construct a hypothetical plan of subdivision or a building
design based on the highest and best use.
Estimate replacement cost - Comparative square metre/foot method
Involves calculating the known cost per square metre (or its imperial equivalent) of a
newlyconstructed
building similar to the subject, and then multiplying
this unit cost by the number of square metres in the subject structure.
Estimated replacement cost - Cost services method
Relies on dollar costs provided in a cost services manual.
Main focus of cost approach
Objective value
Subsitution
A prudent buyer will pay no more for a property than the cost of producing or creating an equally
desirable property, providing no delay occurs in making the substitution.
Step 1 of the cost approach
Estimate the value of the site.
Step 2 of the cost approach
Estimate the replacement cost on the effective date of the appraisal. Reproduction cost may be used
in selected
circumstances.
Step 3 of the cost approach
Estimate the accrued depreciation suffered by the improvements from all causes.
Step 4 of the cost approach
Estimate total depreciated cost by subtracting the accrued depreciation from the reproduction cost
new (or replacement cost, if applicable) of the improvements.
Step 5 of the cost approach
Estimate the value of the property by adding the value of the site to the total depreciated cost.
When is cost approach most applicable
when the property involves relatively new
improvements that represent the highest and best use of the land, or when the site possesses unique
or specialized improvements, for which there are no comparable properties on the market.
Objective value
Valuing method used to calculate cost to create
Subjective value
Valuing method used to calculate site value
What types of buildings are ideally suited to this appraisal method
Specialized property where comparables are not available such as schools, churches and industrial
buildings
What age of properties is this method best for
Fairly new properties
, Why does depreciation affect the age of properties this method is best used for
Because of the difficulty of establishing accurate accured depreciation
Reproduction cost
Cost to reproduce an exact replica of the building
Replacement cost
Cost to produce a building with similar utility using current techniques and materials
Comparative sales method—site valuation
This method of estimating site value is based on the most recent sales data available on similar sites,
preferably in the same neighbourhood.
Adjustment elements for comparitive sales method of site evaluation
•rights conveyed by the transaction;
• financing terms;
• motivation of the parties;
• market conditions (time);
• location; and
• physical characteristics.
Abstraction method—site valuation
separate the value of structures and other physical
improvements from the total value of the property to arrive at a site value
What is the Abstraction method of site valuation also know as
Allocation or extraction method
Land residual method—site valuation
Based on the principle of surplus productivity. This principle affirms that the net income remaining
after satisfying the requirements of labour, coordinating
services and capital is attributed to land and sets its value through the capitalization process.
Land Development method—site valuation
This appraisal method is normally applied when the comparative sales method cannot
be used given a lack of comparable sales. This method is a variation on the land residual
method. The appraiser must construct a hypothetical plan of subdivision or a building
design based on the highest and best use.
Estimate replacement cost - Comparative square metre/foot method
Involves calculating the known cost per square metre (or its imperial equivalent) of a
newlyconstructed
building similar to the subject, and then multiplying
this unit cost by the number of square metres in the subject structure.
Estimated replacement cost - Cost services method
Relies on dollar costs provided in a cost services manual.
