Real Estate Appraisal - Chapter 12: Cost Approach: Reproduction of Improvements
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The cost approach recognizes that there are two major components in real estate. They are:
a. cost and value
b. land improvements
c. supply and demand
d. income expenses
(b) The cost approach recognizes there are two major components in real estate; land and improvements. Page 361
Regarding the cost approach to value, which of the following statements is true?
a. It is the best approach to appraising new condominiums
b. The cost to build an item usually equals its value
c. It is best suited for older buildings because of its reliance on depreciation
d. Like the other two approaches to value, the cost approach to value is not applicable to every appraisal assignment
(d) The cost approach to value is not applicable to every appraisal assignment. Cost approach is inapplicable for condominiums. The cost to build an item rarely equals its value. It is difficult to apply this approach to older buildings, specifically because of its reliance on depreciation. Page 363
Which method of valuing land is most like the market-data approach of appraising?
a. Sales comparison method
b. Allocation method
c. Extraction method
d. Land residual method
(a) The market-data approach (also known as the sales comparison approach) is nearly identical to the sales comparison method used to determine the value of vacant land. Pages 364 & 366.
In Anytown, the ratio of land value to improvement value is historically 2 to 1. If a typical improved comp value is $300,000, what is the typical lot value?
(c) If an improved property is $300,000 and the land to improvement ratio is 2:1, then the land is worth $200,000 and the improvements are worth $100,000. Remember to account for both parts of the ratio: 2 to 1 means 3 parts total. Pages 367 - 368
Linda must identify the value of the land component for a developed property. The property sold recently for $500,000 and she has determined the improvement value, through the cost approach, to be $289,000. Thus, the land value must be $211,000. Linda used which method of land valuation?
c. Sales comparison
d. Land residual
(b) The extraction (or abstraction) method derives the land value of a comparable property by deducting the depreciated costs of the improvements on that property from its known sale price. Page 368
The dollar amount to replicate an improvement using like kind and quality of materials, identical construction and workmanship standards is known as the:
a. replacement cost
c. index cost
d. entrepreneurial cost
(b) Reproduction cost is the dollar amount required to construct an exact replica of the property being appraised. This cost estimate assumes the cost of using like kind and quality of materials, identical construction and workmanship standards, as well as identical design and layout. Page 371
Which of the following is the most in-depth method for estimating cost?
(c) The unit-in-place method is a more in-depth cost estimate that provides more detail than the square-foot or index method. The quantity survey method is the most in-depth of the commonly used methods for estimating costs; however, it was not given as a choice. The like-quality method does not exist. Page 375
In 1984, a three bedroom, two bath single-family detached home cost $65,000 to construct in Anytown, Arizona. The historical cost index for that area is 220 and currently is 378. Using the index method, what is the current replacement cost for this structure?
(a) Divide the current index by the historical index (378 / 220 = 1.718) and then multiply the result by the historical (or original) cost (1.718 X $65,000 = $111,682). Rounded, the best answer is $112,000. Page 376
According to a costing service, a two thousand square foot office building cost $300,000 to build. What is the cost per square foot?
(b) A 2,000 square foot building that cost $300,000 to build has a cost per square foot of $150 ($300,000 / 2,000 = 150). Page 377
A starter home that Earl is appraising contains 978 square feet of above grade improvements and a garage that contains 168 square feet. Earl estimates the land value at $75,000 from recent comkparables. If the cost estimating service Earl uses has a base cost of $81 per unit of above grade improvements and $23 per unit for below grade improvements and a regional multiplier of 1.19, what is the reproduction estimate for the subject home?
(a) The math is as follows:
- Base above grade X above grade area
- $81 X 978 = $79,218
- Base garage X garage area
- $23 X 168 = $3,864
- Total before regional multiplier = $83,082
- Total after regional multiplier= $83,082 X 1.19 = $98,868
- The land Value is not part of the reproduction cost. Page 371
Which method of cost estimation would use the following list?
Foundation - $30 per linear foot
Floor Construction - 3.60 per sq. ft.
Framing - $4.50 per sq. ft. of support area
Roof Construction - $3.70
Exterior Walls - $10.20 per sq. ft.
Windows - $14.20 per sq. ft.
a. Index method
b. Comparative unit method
c. Unit-in-place method
d. Quantity survey method
(c) The unit-in-place method breaks down the cost of a building into the cost of its component parts. The individual costs estimated for each of the building components required in this method are in terms of the standardized unit typically used for the individual building component. Pages 380 - 381
Which of the following is not considered a direct cost?
a. Site utility costs
b. labor financing costs
d. portable toilets
(c) Direct costs include all the costs directly involved with construction including any costs associated with maintaining a construction site. Page 373
In the context of the cost approach to value, an appraisal fee would be considered:
a entrepreneurial profit
b. a direct cost
c. an indirect cost
d. necessary cost
(c) Indirect costs are costs that are part of the overall process of building a project, but are not directly linked to construction. Page 373
Entrepreneurial profit is based on the principle of:
(b) Entrepreneurial profit reflects the amount developers expect to receive for their efforts and its is based upon the principle of anticipation. Page 383
Items which are not attached to the main structure of the property, but still add value are:
a. added to the depreciated value of improvements and land value
b. not depreciated
c. site improvements
d. all of the above
(d) Items like pools, fences and landscaping that are not part of the main primary structure but still add value are called site improvements. Typically, these items are not depreciated. As the final step in the cost approach section on the URAR form, they are added to the depreciated value of improvements and land value to create the overall property value. Page 384
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