Real Estate Appraisal - Chapter 13: Cost Approach: Depreciation of Improvements
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The difference between the improvements' market value and the cost to build them new is called:
a. deferred maintenance
b. future depreciation
c. accrued depreciation
d. internal obsolescence
(c) Accrued depreciation is a loss in value to a property due to any cause as of the effective date of the appraisal. It is the difference between the market value of the improvements and the cost-new of the improvements. Page 400
A house in a middle-income neighborhood is under-valued by $20,000 due to extreme deferred maintenance. The cost to paint, re-floor, replace the broken windows, repair the fixtures, and patch the roof is approximately $15,000. This scenario describes:
a. curable physical deterioration
b. incurable functional obsolescence
c. curable external obsolescence
d. short-lived economic obsolescence
(c) Curable depreciation is a loss in value that is economically feasible to correct. Roof repair or replacement, painting, building maintenance, floor covering replacement, and forced air heater replacement are examples of curable physical deterioration. If spending $15,000 to improve the home returns a value of $20,000 then it is economically feasible, and thus curable. Page 394
A house's value suffers because of its proximity to an airport. An appraiser would identify this as:
(b) Incurable depreciation refers to items of depreciation that either are physically impossible to cure or are too expensive to be of any worth. Moving a property away from an airport is impossible. Page 395
A furnace would qualify as a(n):
a. incurable item
b. short-lived item
c. long-lived item
(c) A furnace typically lasts 20 - 30 years and may never need to be replaced. If it does need replacement, it is usually a curable item. Pages 394 & 400
When constructed, an office building was project to last 80 years. It is currently 24 years old. Using the square foot method, the appraiser concludes that the building new would cost $500,000. Using the age/life method, estimate the office building's current value.
(d) The age/life method uses the ratio of the building's age (or component) to its expected life. 24 divided by 80 = 30%. If 30% of the life has been used, 70% remains. To convert this to value, multiply the cost-new by 70% to get $350,000. Page 401
A house located in an area where the recommended insulation is R-19 has insulation rated at R-42. This home suffers from:
b. external obsolescence
c. internal obsolescence
d. none of the above
(a) Superadequacies are features that are too large or of a higher quality than needed for a property and have a negative effect on property values. Having a home over-insulated for an area qualifies as consisting of higher quality than needed. Page 398
A property valued at $300,000 contains a single-car garage in a neighborhood that predominately contains two-car garages. The typical house value in the neighborhood is $310,000. A contractor estimates the cost of converting the single car garage into a two-car at $15,000. This is an example of:
a. incurable subadequacy
b. curable economic obsolescence
c. incurable functional obsolescence
d. single-car deficiency
(c) Lack of modern facilities most often is curable, but the cost to cure must be measured against the benefit to property value. When adding modern facilities that are valued in the marketplace, they must add equal or greater value than the cost to add in order to be considered curable. From the information given, converting the garage would cost $15,000, but would only add $10,000 to the property's value. Page 398
Which of the following is not a type of depreciation?
a. Incurable functional obsolescence
b. curable external obsolescence
c. deferred maintenance
d. physical deterioration
(b) External obsolescence takes place when influences that are external to the property adversely affect that property. External obsolescence is almost always incurable. Page 398
What is the best way to depreciate the value of land?
a. cost to cure
b. age/life method
c. breakdown method
d. none of the above
(d) While certain physical, functional, and external forces can cause land to lose value, losses attribute to these factors will already have been reflected in the market value estimate of the land. page 400
What is the biggest weakness of the cost to cure method of estimating deprecation?
a. Cost does not equal value
b. it does not allow for partially depreciated items
c. it does not account for fully depreciated items
d. curing is not always economically viable
(b) The cost-to-cure method, while simplistic, only allows for a 100%
A barn was built 40 years ago; however, it has been abandoned and looks 20 years older than it actually is. What is its effective age?
(b) The cost-to-cure method, while simplistic, only allows for a 100% depreciation of any item. When an item like a roof is not brand new, but still has years left before it needs to be replaced, the cost to cure method is not very useful. Page 401
A strip mall was built with the expectation that it would be economically viable for 99 years. Currently, it is 40 years old. The property management company and tenants have exceptionally managed and maintained it and local architectural tastes have not changed. An appraiser concludes that the property has an effective age of 25 years. What is the strip mall's remaining economic life?
a. 15 years
b. 59 years
c. 74 years
(c) The difference between the structure's estimated economic life and its effective age is its remaining economic life. (99 - 25 = 74 years. Page 401
A duplex is 30 years old, has a remaining economic life of 75 years and an effective age of 20 years. The current cost to reproduce the improvements is $450,000. How much depreciation should be charged against this structure?
(c) Using the economic age/life method, divide the effective age by the economic life (20 / 95 = 21%). Then multiply the result by the replacement cost of $450,000 to calculate the amount of accrued depreciation. 450,000 X 21% = $95,000 (rounded). Page 401
Which of the following is not a market extraction technique for estimating depreciation?
(a) Depreciation may be extracted from the market by performing sale-resale analysis, by paired-sale analysis, and by extraction. Page 406
An office building was renting space for $25 per square foot per month but the recent installation of a nearby dump has forced the price down by $4. If the building has 28,000 square feet of rentable space, how much income is being lost each year due to external obsolescence?
(a) If the property is losing $4 per square foot per month then: $4 X 28,000 X 12 (months) equals the total loss per year of $1,344,000. Page 399
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