What reproduction replacement method generally provides the most accurate cost estimate because all of the buildings components are analyzed?
3 mins read The Cost Approach is another valuation methodology for real estate. The post provides a step by step process of how the Cost approach works and presents situations where it should or should not be used. It also covers the type of data and data sources used for carrying out the analysis. The value of the property is equal to the Cost of the Land + the Current cost of Building the structure – the Accrued Depreciation. As the equation shows this involves three steps as given below: This involves considering what the land on its own, i.e. vacant and without any built structures on it, would cost. Step 2: Estimation of the current cost of actually building the structureThere are two ways in which this may be estimated. One is the reproduction cost method and the other is the replacement cost method. Reproduction cost approach involves estimating the cost of replicating the structure completely including construction methods and materials. Replacement cost approach on the other hand involves the cost of building a similar structure but by employing modern construction methods and materials and leaving out features and materials that have become functionally obsolete in current times (e.g. oversized rooms and construction materials that would require a high level of maintenance, etc.). This is the method that is most frequently used when using the cost approach. There are four methods of estimating the reproduction or replacement cost. These are:
Step 3: Estimation of accrued depreciationDepreciation in real estate appraisals refers to the loss of value of the property due from all causes, i.e. physical deterioration as well as functional and external obsolescence. Accrued depreciation is calculated as the difference between the cost of replacing the structure and the current appraisal value of the structure. A simplified approach for calculating the depreciation is to use a straight line economic age-life method. Under this method the total estimated cost of the structure is assumed to depreciate in a linear manner at a constant rate over the life span of the structure. The annual depreciation amount is the total cost of the structure divided by the life span. The accrued depreciation would be the annual depreciation amount times the effective/ actual age of the structure. b. Appropriate UsesThe cost approach is used for properties:
c. Inappropriate UsesIt is inappropriate to use this approach to value properties that have had older improvements or that suffer from substantial depreciation in its physical structure or that have a number of features with outdated or obsolete functionality. d. Sources of Data/ Information
We have detailed the Cost Approach to collateral valuation of real estate above. In the next post we will look at other pledged assets are valued. What reproduction replacement method generally provides the most accurate cost estimate because all of the building's components are analyzed?The quantity survey method is most accurate. The square foot and unit-in-place methods provide a more generalized look. To use the square foot method to estimate a building's reproduction cost, the appraiser should take the following steps: (1) Find the dimension of the building.
Which of the four methods used to find the reproduction cost of a structure is most often used by appraisers?The square footage method is the one more commonly used by appraisers to estimate reproduction cost.
What methods can be used when determining value through the cost approach quizlet?Property Value by Cost Approach formula requires three separate steps, which include:. estimating the reproduction or replacement cost of the improvements;. estimating depreciation;. estimating the value of the land.. Which method of estimating depreciation is the easiest to apply?The straight-line method is the simplest and most commonly used way to calculate depreciation under generally accepted accounting principles. Subtract the salvage value from the asset's purchase price, then divide that figure by the projected useful life of the asset.
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