Replacement cost estimation and physical, functional, and external depreciation concepts used in the cost approach to value.
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- What are the three main components in the cost approach to value formula?
- Land value plus replacement cost of improvements minus depreciation
- Define replacement cost in real estate appraisal.
- The cost to construct a building of equivalent utility using current materials, methods, and standards.
- What is reproduction cost?
- The cost to construct an exact duplicate of the building using the same materials and methods originally used.
- Which type of cost is more commonly used in the cost approach: replacement or reproduction?
- Replacement cost, because it reflects current standards and is more economically realistic.
- Define physical depreciation.
- Loss in value due to deterioration or wear and tear of building materials and components.
- What is deferred maintenance?
- Physical deterioration that the property owner has not yet repaired, reducing building condition.
- What is the difference between curable and incurable physical depreciation?
- Curable depreciation is economically feasible to fix; incurable is too costly to justify repairing.
- Define functional obsolescence.
- Loss of value due to design deficiencies or outdated features that reduce property utility or desirability.
- Give an example of curable functional obsolescence.
- Outdated kitchen appliances or flooring that can be cost-effectively replaced.
- Give an example of incurable functional obsolescence.
- Inadequate ceiling height or poor floor plan layout that would be costly to correct.
- Define external obsolescence or external depreciation.
- Loss of value due to external conditions or factors outside the property boundaries.
- Name three examples of external obsolescence.
- Proximity to hazardous waste, street noise, and declining neighborhood values.
- Why is external obsolescence always considered incurable?
- Because the cause originates outside the property and cannot be fixed by the property owner alone.
- What is the straight-line depreciation method?
- A method assuming a building depreciates at a constant percentage of its original cost each year over economic life.
- What is the age-life method of depreciation?
- Depreciation equals (actual age divided by remaining useful life) times replacement cost.