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Loss of value due to design deficiencies or outdated features that reduce property utility or desirability.- Give an example of curable functional obsolescence.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Outdated kitchen appliances or flooring that can be cost-effectively replaced.- Give an example of incurable functional obsolescence.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