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The Cost Approach - Chapter 6

Terms in this set (15)

Cost Model
1. Generic (hybird) models:
- V = GQ X (Pi X Qi + Pl X Ql + OA)
V= Market Value
GQ = General quality factor
Pi= Price of improvement related items (Cost of Const)
Qi= Quantity (sqft or amt) of improvement related items
Pl= Price of land (from mkt)
Ql= Quantity (amt) of land
OA= Other additions (Cost of Const)
2. Improvement Prices (Pi) and other items (OA) represent construction cost. (Supply side of the market)
3. Land prices (Pl) and depreciation s/b market derived. (demand side of the mkt).
Direct Costs
1. Materials
2. Labor
3. Supervision
Indirect Costs
1. Architectural and engineering fees
2. Building permits
3. Insurance
4. Interest
5. Taxes incurred during construction
6. Marketing
7. Overhead and profit
Reproduction Cost
1. Cost of constructing an identical structure
2. Includes the added cost of obsolete design, building techniques, and materials.
Replacement Cost
1. Cost constructing a substitute structure of equal utility.
2. Used in mass appraisal
3. Based on typical costs.
Steps in the Cost Approach
1. Estimate site value, as if vacant
2. Estimate replacement cost new (RCN)
3. Determine and subtract depreciation (RCNLD)
4. Add land value
5. Apply necessary market adjustments.
Cost Tables
1. Used to determine RCN
2. Sources
- Commercial cost services
- Mass appraisal companies
- State agencies
- In-house (based on local costs)
Time and Location Modifiers
1. Factors to reflect the market.
2. Cost tables must be current and reflect the local market.
Depreciation Schedules
1. Market derived
2. Reflect differences in building and construction types
Market Adjustment Factor
1. Based on sales ratios studies
2. Usage s/b minimal if replacement costs, depreciation, and land values are correct.
Methods of Estimating Cost
1. Quantity survey method
2. Unit-in-place method
3. Comparative unit method
4. Trended original cost method
Quantity Survey method
1. Itemization of costs for each building component and sub-component.
2. Indirect costs estimated separately
3. Produce reproduction costs
4. Limited use in mass appraisal.
Unit-in-Place Method
1. Cost of each major building component on a per unit basis.
a) Horizontal cost components (per sqft basis)
- Floors
- Roofing
- Foundations
- Electrical systems
b) Vertical cost components (per linear ft basis)
- Exterior walls
- Interior partitions
c) Lump sum items
- Water Heaters
- Fireplaces
2. Includes all direct and most indirect costs.
- when summed the entrepreneurial profit is applied to create total cost estimate.
3. Uses in mass appraisal
a) Develop benchmark costs
b) Adjust for nonstandard features
c) Appraise unique properties
Comparative Unit Method
1. Direct and indirect costs w/ entrepreneurial profit are summed and divided by appropriate unit to obtain a cost per unit.
2. Expressed as per sqft.
3. One base rate is developed for each building class.
4. Costs are taken from cost manuals or developed from local analysis.
5. Costs are arrayed in schedules by:
a) building type
b) size
c) shape
6. Most common method in mass appraisal
- produces replacement costs
- adjustments are made for differences from base specifications.
Trended Original Cost Method
1. Involves an indexing of historical costs to current costs.
2. Tends to produce reproduction costs
3. Uses in mass appraisal
- Appraise unique properties foe which the cost of construction is known.
- Help validate cost estimates produced by other methods.
4. Trend Factor = Current Factor / Historic Factor
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