A 2,400-sf dwelling has a current cost new of $185 per square foot. Total depreciation of the improvements is estimated at $52,000, and the site value is $115,000. The cost figure covers all cost components without overlap. What is the indicated value by the cost approach?
Correct Answer
C) $507,000
185×2400−52000+115000 = 507000. Common errors: leaving out the site value gives $392,000; adding the depreciation instead of deducting it gives $611,000; stopping at cost new, before depreciation and site gives $444,000.
Why This Is the Correct Answer
Option C is correct because cost new is $185 x 2,400 sf = $444,000. Deducting $52,000 of depreciation leaves $392,000, and adding the $115,000 site gives $507,000.
Why the Other Options Are Wrong
Option A: $392,000
Option A, $392,000, is wrong because it is the depreciated improvement value ($444,000 - $52,000) without the $115,000 site. Adding the site gives $507,000.
Option B: $444,000
Option B, $444,000, is wrong because it stops at cost new ($185 x 2,400) before deducting depreciation and adding site value. The full indication is $507,000.
Option D: $611,000
Option D, $611,000, is wrong because it adds the $52,000 depreciation instead of deducting it ($444,000 + $52,000 + $115,000). The correct total is $444,000 - $52,000 + $115,000 = $507,000.
Build, subtract wear, add land
Cost new minus depreciation plus site value is the cost approach in one line.
How to use: Use this sequence for any cost approach total.
Exam Tip
Depreciation is taken away from cost new in this formula, and site value is added at the end. Check that you finished all three steps.
Common Mistakes to Avoid
- -Adding depreciation instead of subtracting it
- -Forgetting to add the site value
- -Stopping at cost new before depreciation
Concept Deep Dive
Analysis
This question tests the basic cost approach sequence using the square-foot method. Cost new is $185 x 2,400 = $444,000; subtracting $52,000 depreciation gives $392,000; adding the $115,000 site gives $507,000.
Background Knowledge
The square-foot method multiplies a unit cost by the building's area to estimate cost new. In the cost approach, depreciation is subtracted from cost new and site value is added to reach the value indication.
Real-World Application
An appraiser uses a cost service to estimate $185 per square foot for a 2,400 sf house, deducts supported depreciation, and adds the site value from land sales. The result is the cost approach indication on the report.
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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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?