Cost Approach

Cost Approach

Sometimes it is difficult to locate comparable properties. Therefore, there has to be another approach that will allow one to arrive at a professional estimate of value. Essentially you are asking what it would cost if the building being appraised were built today.

1. Cost reproduction: How much would it cost to build an exact replica of the building? This approach to appraisal can be difficult and costly since accuracy is important.
2. What does it cost to construct a building having the same utility as the subject property? Since the utility is the key factor, the building may vary in non-essential ways.
3. Formula: Land + Improvements – Depreciation = Value NOTE: The building is depreciated BUT the land is not.
4. The cost approach is the only one of the three approaches which gives a separate, specified value to land. To find the value of the land, the comparison or Market Data Approach used.
5. Methods to determine cost of improvements:
   1. Quantity Survey, The formula is: Materials + Labor + Management Fees + Profit = Value
   2. Unit -in – Place: with this method, the appraiser determines the cost of components or estimates of subcontractors. For instance, what would it cost to have an arched entrance built between the living room and the dining room (component) or what would an electrician charge to do the electrical work (subcontractors).
   3. Cubic foot method: A value is assigned to each cubic feet times the cost per cubic foot. This method is used when vertical space is considered as valuable as horizontal space, such as in a warehouse.
   4. Square foot method: This method is the most common method used in the cost approach.

• i. A price per square foot is determined, based on features and quality of the improvement and multiplied by the total number of square feet in the property.
• ii. The Marshall & Swift Subscription Service is the most commonly used in Utah to determine the cost per square foot.

1. Depreciation refers to any problem that may cause an actual or accrued loss of value.
   1. Three causes of depreciation:

• i. Physical deterioration – something is not working properly, such as a leaky roof or a faulty foundation.
• ii. Functional Obsolescence – everything works fine, but nobody wants it. It is internal to the property such as a poor floor plan, not enough electrical outlets, outdated appliances and fixtures…
• iii. Economic, or external, obsolescence (also called locational, political, or social obsolescence) – Things that cause economic obsolescence originate outside the boundaries of the property, and are usually considered incurable. Examples would include a rundown neighborhood, high property taxes, depression of the economy, …

1. 1. Curable depreciation occurs when it is cost effective to repair a problem that is causing loss of value.
   2. Incurable depreciation occurs when it isn’t cost effective to make the needed repairs.
   3. Deferred maintenance develops when repairs have been delayed.