The Student Handbook to THE APPRAISAL OF REAL

The Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 27 The Cost Approach

Relation to Appraisal Principles n n n Substitution Supply and demand Balance Externalities Highest and best use Stabilization Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 27 2

Applicability and Limitations n n n Often seen as the highest price that market participants would pay Most applicable when improvements are new and land value is well established Less applicable to older properties and properties for which the effect of functional problems on value is hard to support Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 27 3

Procedure n n Land value Reproduction cost versus replacement cost Cost estimates q Direct costs – usually in the builder’s contract to build q Indirect costs – costs outside the building contract but still part of the cost of construction Entrepreneurial incentive and entrepreneurial profit Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 27 4

Procedure, continued n Depreciation q Physical deterioration – caused by wear and tear or the passage of time q Functional obsolescence – usually the result of the property no longer conforming to a market requirement or not in compliance with highest and best use q External obsolescence – caused by factors outside the property q Depreciation in appraising and accounting Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 27 5

Cost Approach Procedure Example Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 27 6