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    Cost Approach To Valuation

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    jeffbaydal45

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    Cost Approach To Valuation

    Uploaded by

    jeffbaydal45
    8 views13 pages

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    Cost approach to valuation

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    8 views13 pages

    Cost Approach To Valuation

    Uploaded by

    jeffbaydal45

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    Cost approach Valuation

    The cost approach is a real estate valuation


    method that estimates the price a buyer
    should pay for a piece of property is equal the
    cost to build an equivalent building.
    There are two main
    types of cost approach
    appraisals:
    Reproduction method:
    This version considers what a replica of the
    property would cost to be built and gives attention
    to the use of original materials.

    Replacement method:
    In this case, it is assumed that the new structure
    has the same function but with newer materials,
    utilizing current construction methods and updated
    design.
    When to Use the
    Cost Approach?
    Special Use Properties

    The cost approach is required and sometimes is


    the only way to determine the value of exclusive-
    use buildings, such as libraries, schools or
    churches. These resources generate little income
    and are not often marketed, which invalidates the
    income and comparable approaches.
    1. Estimate the reproduction or replacement
    cost of the structure

    The step involves estimating the current cost of


    building the structure from scratch and the site
    improvements. The cost can be estimated using
    the following two methods:

    2. Estimate the market value of land

    The next step is to estimate the value of the land


    on which the property is being built. The most
    appropriate method of estimating the land value is
    the direct comparison method, where the current
    price of land is obtained from the value of recently
    sold plots of land. It is the market value that you
    would pay for the land today if it was vacant. In
    this case, let us assume that the market value of
    the land is $750,000.
    3. Estimate the depreciation of the improvements
    Depreciation is the loss in value of the building and
    or its improvements, and it causes the difference
    between the value of improvements and the
    current contributing value of the improvements.
    When estimating the depreciation of the property,
    you should consider the physical, functional, and
    economic depreciation.

    Physical depreciation refers to the wear and tear


    that occurs as the building ages, while functional
    depreciation occurs with the changes in consumer
    tastes and preferences over a period of time.
    Example 1:

    Valuing a New Custom Home**


    A new custom-built home is being valued, and
    there is little sales data on comparable homes in
    the area due to its unique design.

    1. **Reproduction or Replacement Cost**: The cost


    to build an equivalent house, with the same size,
    design, and quality of materials, is estimated at
    $500,000.
    2. **Depreciation**: Since the house is brand new,
    there is no physical deterioration, functional
    obsolescence, or external obsolescence, so
    depreciation is minimal.
    - Depreciation: $0
    3. **Land Value**: The market value of the land on
    which the house is built is assessed at $150,000.

    **Property Value** = ($500,000 - $0) + $150,000


    = **$650,000**
    Example 2:
    Valuing an Older Commercial Building**
    An older office building is being valued for sale, but there are
    few comparable buildings nearby.

    1. **Replacement Cost**: The cost to build a similar office


    building today, using modern construction techniques and
    materials, is estimated at $1,200,000.
    2. **Depreciation**: Since the building is 20 years old,
    depreciation needs to be factored in:
    - **Physical deterioration**: The building shows signs of wear
    and tear, estimated at $200,000 in loss of value.
    - **Functional obsolescence**: The building design no longer
    meets modern office requirements, such as smaller windows and
    outdated electrical systems, contributing to an additional
    $100,000 in loss of value.
    - **External obsolescence**: There is no external obsolescence
    affecting the building.
    - Total depreciation: $300,000
    3. **Land Value**: The land on which the office building sits is
    valued at $400,000.

    **Property Value** = ($1,200,000 - $300,000) + $400,000 =


    **$1,300,000
    Thank You

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