The subject dwelling contains 2,400 square feet, and its current cost new is $185 per square foot. Total depreciation of the improvements is estimated at 25%, and the site value is $210,000. What is the indicated value by the cost approach?
Correct Answer
C) $543,000
2400×185×0.75+210000=543000. Common errors: leaving out the site value gives $333,000; not deducting the 25% loss gives $654,000; applying the 25% loss as the remaining share gives $321,000.
Why This Is the Correct Answer
Option C is correct because cost new is 2,400 x $185 = $444,000, the 25% loss leaves $444,000 x 0.75 = $333,000, and adding the $210,000 site gives $543,000.
Why the Other Options Are Wrong
Option A: $321,000
Option A, $321,000, comes from $444,000 x 0.25 + $210,000, which treats the 25% loss as the remaining share. The remaining share is 75%, giving $333,000 + $210,000 = $543,000.
Option B: $333,000
Option B, $333,000, is $444,000 x 0.75, the depreciated improvements without the $210,000 site. Adding the site gives $543,000.
Option D: $654,000
Option D, $654,000, is $444,000 + $210,000, which skips the 25% loss. Deducting it gives $333,000 + $210,000 = $543,000.
Cost, minus loss, plus land
Follow the cost approach order: build cost new, take off depreciation, then add the site.
How to use: Use this order to set up any cost approach total.
Exam Tip
Convert a loss percentage to its remaining share before multiplying, and check that land is added only once.
Common Mistakes to Avoid
- -Multiplying by the loss percentage instead of the remaining share
- -Forgetting the site value
- -Skipping depreciation
Concept Deep Dive
Analysis
This question tests the basic cost approach sequence: cost new, less depreciation, plus site. A 25% total loss means 75% of cost new remains, and the site value is added afterward.
Background Knowledge
The cost approach estimates value as cost new of the improvements less depreciation from physical, functional and external causes, plus site value. A stated percentage loss is applied to cost new before adding site value.
Real-World Application
An appraiser costs a home at a per-square-foot rate, applies a supported total depreciation percentage, and adds land value from lot sales to reach the cost approach indication.
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
Under the Uniform Appraisal Standards for Federal Land Acquisitions, which depreciation methods must support the dollar amount of each form of depreciation, rather than published tables or age-life computations?
Next Question
An appraiser estimates the current cost new of a 2,400-sf building at $205 per square foot. The effective age is 16 years and the total economic life is 64 years. Using straight-line age-life depreciation with no salvage value, and with no other losses, what is the depreciated cost of the improvements, excluding any site value?