An appraiser estimates hard costs of $420,000 and separate soft costs of $50,000, which together include all required improvement costs. Total depreciation is estimated at 30% of their sum, and the site is valued at $220,000. What total value does the cost approach indicate?
Correct Answer
C) $549,000
(420000+50000)×0.70+220000=549000. Use the full cost buildup and apply the loss to that total. Common errors: leaving out the site value gives $329,000; leaving out the soft costs gives $514,000; not applying the 30% loss gives $690,000.
Why This Is the Correct Answer
Option C is correct because cost new is $420,000 + $50,000 = $470,000, and applying the 30% loss leaves $470,000 × 0.70 = $329,000. Adding the $220,000 site gives $549,000. The complement of the 30% depreciation is 70% percent good.
Why the Other Options Are Wrong
Option A: $329,000
Option A is wrong because $329,000 is ($420,000 + $50,000) × 0.70, which leaves out the $220,000 site value. Adding the site gives $549,000.
Option B: $514,000
Option B is wrong because $514,000 is $420,000 × 0.70 + $220,000, which leaves out the $50,000 soft costs. Including them gives $470,000 × 0.70 + $220,000 = $549,000.
Option D: $690,000
Option D is wrong because $690,000 is $420,000 + $50,000 + $220,000 with no 30% loss applied. Applying the loss gives $329,000 + $220,000 = $549,000.
Percent good times full cost
Multiply the full cost new by percent good, which is 100% minus the depreciation percentage, then add the site.
How to use: Use this shortcut when a cost problem gives depreciation as a percentage of total cost.
Exam Tip
Apply the percentage to the base the stem names, here hard plus soft costs, and remember to add the site afterward.
Common Mistakes to Avoid
- -Applying the depreciation percentage to hard costs only
- -Forgetting to add the site value
- -Skipping the depreciation step
Concept Deep Dive
Analysis
This question tests applying a percentage loss to the full improvement cost and then adding the site. Hard and soft costs together make up cost new, and the stated 30% loss applies to their sum. The remaining 70% is the depreciated improvement value, to which the site value is added.
Background Knowledge
Full cost new includes both direct (hard) and indirect (soft) costs. When depreciation is stated as a percentage, multiplying cost new by percent good, the complement of the depreciation percentage, gives the depreciated improvement value. Site value is added separately.
Real-World Application
An appraiser totals a home's hard construction costs and soft costs such as permits and fees, then applies a market-supported 30% overall depreciation. The depreciated improvement figure is added to the site value from land sales to produce 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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