An appraiser is developing the cost approach in an appraisal assignment. As of which date should the cost estimate be measured?
Correct Answer
A) The effective date, with supported forecasts if prospective.
A cost estimate must be consistent with its relevant effective date and assignment assumptions. A prospective date requires supported forecasts, while an as-is current date uses current evidence. Plan, engagement and completion dates are not interchangeable by default.
Why This Is the Correct Answer
Option A is correct because the effective date is the date to which the appraiser's analyses, opinions and conclusions apply. The cost basis must reflect that stated date, and for a prospective date that means using supported forecasts of cost.
Why the Other Options Are Wrong
Option B: The date the improvements were originally planned.
Option B uses the date the improvements were originally planned. Plan-date costs reflect an earlier cost level and do not match the stated effective date of the cost indication.
Option C: The construction finish date, even if the effective date differs.
Option C uses the construction finish date whatever the effective date is. Costs change over time, so a cost basis tied to a different date does not support a value as of the stated effective date.
Option D: The date the client engaged the appraiser.
Option D uses the date the client engaged the appraiser. The engagement date is an administrative date and is not interchangeable with the effective date of the analysis.
Cost Wears the Same Date
The cost estimate must wear the same date as the value opinion. Different dates mean mismatched dollars.
How to use: Use this check whenever a question offers several dates for a cost basis.
Exam Tip
Match the cost date to the effective date stated in the assignment. Other dates like engagement or plan dates are usually distractors.
Common Mistakes to Avoid
- -Using the engagement date as the effective date
- -Using original plan costs without updating them
- -Ignoring forecast support for a prospective effective date
Concept Deep Dive
Analysis
This question tests consistency between the cost estimate and the assignment's effective date. The effective date is the date to which the analyses and conclusions apply, so cost must be measured as of that date. If the date is prospective, the cost figures need supported forecasts.
Background Knowledge
An appraisal's effective date can be current, retrospective or prospective, and all data should be consistent with it. The more current the cost data relative to a current effective date, the more reliable the cost approach.
Real-World Application
A lender asks for a prospective as-completed value for a home still under construction. The appraiser bases her cost estimate on supported projections for the completion date rather than on the original plan budget.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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Previous Question
Improvement base costs total $500,000 and explicitly exclude entrepreneurial incentive. Add a supported incentive 10% of that base. Total depreciation $60,000 is expressly measured for the full resulting cost including incentive. Add site $200,000. What indication results?
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In a cost model, the site estimate and dwelling base expressly exclude driveways and landscaping. How should these separate site improvements be handled?