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Cost Approach
Cost Approach Definitions
106
Real Estate & Planning
Professional
11/22/2011

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Term
Actual Age
Definition
Also called historical or chronological age, this is the number of years that have elapsed since an original structure was built.
Term
Abstraction Method
Definition
Method of appraising vacant land. The allocation of the total sale price or appraised value of a property between land and building, either by using a ration or by subtracting a figure representing building value from the total price (or value). Also called the Allocation Method.
Term
Accrued Depreciation
Definition
The difference between an improvement's reproduction or replacement cost and its present value as of the date of the appraisal. LOSS IN VALUE THAT HAS ALREADY OCCURRED
Term
Base Cost
Definition
Average or typical building costs, usually from cost manuals; used, with appropriate refinements, to estimate cost of construction.
Term
Book Depreciation
Definition
The amount of capital recapture charged off on an owner's books.
Term
Building Codes
Definition
Municipal ordinance that regulates the type and quality of building materials and methods of construction permitted.
Term
Class A Construction
Definition
Fire resistant, structural steel frame; fireproofing may be of concrete, masonry or sprayed on fire inhibitors (used in high-rise, large office and hotel buildings).
Term
Class B Construction
Definition
Fire resistant, reinforced concrete (used in high-rise, large office buildings and parking structures).
Term
Class C Construction
Definition
Fire resistant, concrete or masonry (brick too) with some wood and sheet metal (used in medium-sized 1 and 2 story commercial and industrial buildings such as suburban stores).
Term
Class D Construction
Definition
Non-fireproof (combustible) wood frame with stucco, siding or veneer exterior walls (used mostly in residential, some commercial and industrial buildings).
Term
Comparative Costs
Definition
Estimating building costs by relating the costs to similar buildings
Term
Comparative square foot method
Definition
method of estimating construction costs, using typical square-foot costs for the type of construction being estimated.
Term
Conditions, covenants, and restrictions (CC&Rs)
Definition
Recorded deed restrictions that run with the land, usually initiated by the original subdivider.
Term
Condominium
Definition
a form of legal ownership; each individual owns the airspace in his or her unit in fee simple, plus an undivided interest in the structural supports, building systems, and all common areas.
Term
Construction Classification
Definition
Type of Construction; a system that rates the basic frame, walls, and roof of a structure as to their relative fire resistance (CLASS A B C or D, Class A beginning most fireproof).
Term
Corner Lot
Definition
Lot with frontage on two intersecting streets
Term
Cost Approach
Definition
It involves estimating the replacement cost new of the improvements, deducting the estimated accrued depreciation, and then adding the market value of the land.
Term
Cost Basis
Definition
Original price paid for a property, plus capital improvements less depreciation. (an accounting term)
Term
Cost multiplier
Definition
factor used in adjusting published construction cost figures to estimate current and local costs.
Term
cost to cure method of depreciation
Definition
method of estimating accrued depreciation (loss in value), on the cost to cure or repair observed building defects.
Term
cul-de-sac lot
Definition
lot located at or near the end of a dead-end street.
Term
curable depreciation
Definition
items of physical deterioration or functional obsolescence that if repaired would add at least as much to the market value of the property as the cost of repairs.
Term
deed restrictions
Definition
private limitations, set forth in the deed to a property, that dictate certain uses that may or may not be made of the property
Term
depreciation
Definition
a loss in value from any cause
Term
depreciated cost method
Definition
method of adjusting comparable sales; adjustments are calculated from an analysis of the depreciated replacement cost for each differentiating feature.
Term
depth
Definition
distance from the frontage of a lot to the rear lot line.
Term
design code
Definition
method of describing a building by its construction purpose
Term
development method (land development method)
Definition
method of vacant land valuation; development costs are subtracted from estimated gross sales and, finally, developers profit are accounted for. The results provide an estimate of raw land value
Term
Direct Costs
Definition
All of the costs that are directly involved with the physical construction of the structure, including labor, materials and equipment, design and engineering, and subcontractors fees.
Term
easement
Definition
right, privilege, or interest that one party has in the land of another, created for a specific purpose by grant, agreement, or necessity
Term
economic obsolescence
Definition
loss in value that is cause by factors located outside the subject property; locational or environmental obsolescence. Almost always incurable because the cost to repair is usually very large.
Term
economic life
Definition
the estimated period over which the improvements will continue to contribute to the property value.
Term
effective age
Definition
relative age of a structure, considering its physical condition, utility and marketability
Term
flag lot
Definition
rear lot, behind other houses or lots, with a long, narrow access road ( like a flagpole).
Term
frontage
Definition
boundary line or lot side that faces a street
Term
functional utility
Definition
the combination of the usefulness and attractiveness of a property
Term
highest and best use
Definition
the reasonable and probable use of a property that will support the highest present value of the land
Term
historic cost
Definition
cost of a property at the time it was constructed or purchased.
Term
improvement
Definition
permanent structure or other development that becomes part of the land
Term
incurable depreciation
Definition
building defects or problems that would cost more to repair than the anticipated value increase from such repair.
Term
index method
Definition
method of estimating construction costs; adjusts the original costs to the current cost level by a multiplier obtained from a published cost index.
Term
indirect costs
Definition
all of the time and money costs involved in a construction project that are not directly involved with construction itself. Examples are loan fees, interest, legal fees, and marketing costs.
Term
interior lot
Definition
lot with frontage on only one street
Term
key lot
Definition
lot that has several other lots backing onto its side yard
Term
long lived, incurable physical deterioration
Definition
loss in value attributable to the major components of the building, when age is the major contributing factor and the cost of repair would exceed the value that would be added to the structure by the repair.
Term
misplaced improvement
Definition
a building that is the wrong type or use for its location; an example of functional obsolescence.
Term
normal depreciation
Definition
ordinary physical and functional loss that improvements suffer
Term
percent good
Definition
difference between cost new and the amount of depreciation
Term
physical deterioration
Definition
wear and tear from use, age, the weather, neglect, lack of maintenance, and/or vandalism.
Term
planned unit development (PUD)
Definition
a project consisting of individually owned parcels of land, with a common area and facilities owned by an association of which the owners of all parcels are members.
Term
plottage
Definition
the combining of two or more parcels together for increased utility. Also referred to as assemblage. The term plottage is used to denote plottage value.
Term
plottage value
Definition
the increase in utility or unit value that is created by joining two or more parcels together into one large ownership.
Term
principle of change
Definition
real estate values are constantly changed by social, economic, and political forces in society.
Term
principle of conformity
Definition
maximum value results when properties in a neighborhood are relatively similar in size, style, quality, use, and/or type.
Term
principle of consistent use
Definition
requires that land and improvements be appraised on the basis of the same use
Term
principle of substitution
Definition
when a property can be easily replaced by another. The property is worth no more than what it would cost to produce or buy a substitute property with same utility. no unnecessary delay should be encountered in obtaining the substitute property
Term
quality of construction
Definition
classification or rating based on basic structural integrity, materials, finishes, and special features
Term
quantity survey method
Definition
process for arriving at a cost estimate for new construction, involving a detailed estimate of the quantities of raw materials used, the current price of each material, and installation costs. Also called the builder's breakdown cost method.
Term
RCLD
Definition
Replacement cost, less all forms of depreciation
Term
RCLND
Definition
Replacement cost, less normal depreciation
Term
RCN
Definition
Replacement Cost New
Term
Replacement Cost
Definition
The estimated cost to construct, at current prices, a building WITH UTILITY EQUIVALENT to the building being appraised, using modern materials and current standards, design, and layout.
Term
Reproduction Cost
Definition
The estimated cost to construct, at current prices, an EXACT duplicate, or replica, of the building being appraised, using the same materials, construction standards, design, layout, and quality workmanship, EMBODYING ALL THE SUBJECTS DEFICIENCIES< SUPER-ADEQUACIES, AND OBSOLESCENCE
Term
Sales Data Method of Depreciation
Definition
Method of estimating depreciation, where in building values abstracted from sales are compared to current costs new
Term
straight line method of depreciation
Definition
method of estimating depreciation, in which the loss in value of a building is assumed to be the ratio of its age (or effective age) to its total useful or economic life.
Term
T-intersection lot
Definition
lot suffers from danger of speeding cars; but seldom sell for lower price; commercial parcels may sell at a premium
Term
Unit in place
Definition
method of estimating installed costs
Term
use code
Definition
method of describing the property's general use
Term
variance
Definition
in zoning, a legal exception to the use, type, density, or other allowable feature of the normal permitted development or use of a specific site.
Term
cost approach
Definition
adding the depreciated replacement cost of the improvements to the value of the land as estimated from a market or economic study. The cost approach is also known as the SUMMATION approach because of the addition step involved in the process
Term
3 Major Types of Accrued Depreciation
Definition
1. Physical Deterioration (curable and incurable)
2. Functional Obsolescence (curable and incurable)
3. Economic (external) obsolescence (curable and incurable)
Term
The important site characteristics are divided into 2 types
Definition
1. physical
2. legal and locational
Term
Physical Features
Size
Definition
The best unit of comparison in the analysis of sales; but its relative importance is dependent on both use and zoning requirements
Term
Physical Features
Shape
Definition
Refers to general parcel configuration and its relative dimensions; irregular or long and narrow shape may reduce site's utility
Term
Irregular vs Normal Physical Features
Advantages... Disadvantages
Definition
Advantage- potential view; privacy
Disadvantage- higher development cost and utility cost
Term
Market or Direct Sales Comparison Method
Definition
Considered the most accurate method whether vacant or improved parcels
A. Locate similar land sales
B. Compare Sales to subject property
C. Make adjustments
D. Arrive at indicated value of the subject property
Term
Two steps of allocation method
Definition
A. find sales of improved properties with similar site characteristics to the subject
B. allocate a proportion of the sales price to the land
Term
Four primary methods of land valuation
Definition

1. Market or Direct sales comparison method 2. Abstraction or Allocation Method 3. Land Development 4. Land Residual Method

 

Term
Land Development Method
Definition
Use this method to estimate the value of vacant acreage that is ready for subdivision. This is a useful method when there are no sales of comparable acreage or when detailed analysis of the project is warrented.
Term
Five Basic Steps in the cost approach
Definition
1. Estimating the value of the land as if vacant and available for use
2. Estimating the current cost to reproduce or replace the existing improvements
3. Deciding on appropriate amounts of accrued depreciation
4. Deducting the accrued depreciation from the cost new of improvements
5. adding the depreciated cost of the improvements to estimated land value to arrive at prop. value
Term
four concepts of cost
Definition
1. historic cost
2. reproduction cost
3. replacement cost
4. trend cost
Term
trend cost
Definition
actual cost as of a particular date updated to the current period.
Term
the comparative square foot method
Definition
cost of a particular building is estimated by applying the avg or typical sq ft cost of similar buildings
Term
two types of cost
Definition
Direct and Indirect
Term
functional obsolescence
Definition
a type depreciation that is caused by a relative loss of building utility. Loss of utility means there is some feature of the building that is not useful as it cost would suggest.
Term
Before performing the site inspection, you should:
Definition
Gather basic information about the site
Be sure you know the reasons for the site inspection
have a map or drawing of the site
Term
The first important reason for inspecting and analyzing the site is
Definition
estimate the highest and best use
Term
An appraiser should identify and record the physical characteristics, the public and private restrictions, and the locational elements of a site. Which of the following is considered an aspect of location?
Definition
Neighborhood conformity
Term
What best describes the site in a PUD
Definition
subdivided lot, plus appurtenant interest in the common areas
Term
Highest and Best Use Must Have all four of:
Definition
Physically possible
legally permitted
economically feasible
maximally productive
Term
The appraisers opinion of highest and best use should include:
Definition
the highest and best use as if vacant and the highest and best use as presently improved
Term
During the building inspection. to record data you will need:
Definition
a checklist or appraisal form
Term
some of the factors usually considered to influence the cost of construction are
Definition
design or use type, construction classification, rating of quality
Term
Good architectural design consists, in part, of
Definition
functional utility
Term
Land value may be abstracted from the sales of improved property. The method is most useful:
Definition
In built up areas where little vacant land remains
As an alternative to the market method when comparable sales are not available.
Term
The unit of comparison for vacant land appraisals is ideally
Definition
The unit considered by the market to be most important
Term
The cost estimates used in appraisals are what we describe as generalized economic costs. This means that they should reflect:
Definition
Cost levels on the date of value, not "book" costs or historic costs
Typical Costs to build such a building
Term
From the appraisers point of view, replacement cost estimates are preferred over reproduction cost estimates because
Definition
they provide a direct rating of the market demand for the quality and design of a structure
they are less time consuming
Term
The most practical and widely used method of estimating construction costs is
Definition
the comparative square foot method
Term
The cost-estimating method that is often used as a supplement to refine the square-foot method is called
Definition
the unit in place method
Term
In accounting practice, depreciation is treated as
Definition
a theoretical loss in value
an expense before taxes
Term
in appraisals depreciation can be defined as
Definition
actual loss in value compared to cost as if new
diminished utility compared to new
Term
Abstraction Method Steps
Definition
Estimate the value of the subject property
estimate the cost of the improvements less depreciation
subtract the depreciated cost of the improvements from the total estimated property value to derive an estimated land value for the subject property
Term
INdex (Trended Historical Cost) Method Formula
Definition
Original x Current year index/Historical year index = Current cost
Term
Four Basic Methods of Estimating Cost
Definition
The comparative square foot method
unit in place method
index (trended historical cost) method
quantity survey method
Term
four concepts of cost
Definition
historic cost
reproduction cost
replacement cost
trend cost
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