The as-completed cost of the improvements is $540,000, and 80% of that cost is installed. A $22,000 loss applies to the installed portion, and the site value is $175,000. What total is indicated, before any consideration of completion risk or profit?
Correct Answer
B) $585,000
540000×0.80−22000+175000 = 585000. Common errors: leaving out the site value gives $410,000; using the full as-completed cost instead of the 80% installed fraction gives $693,000; not deducting the $22,000 loss gives $607,000.
Why This Is the Correct Answer
Option B is correct because $540,000 x 0.80 = $432,000 installed cost, less the $22,000 loss gives $410,000, and adding the $175,000 site gives $585,000. Each stated step is applied once in the stated order.
Why the Other Options Are Wrong
Option A: $410,000
Option A, $410,000, leaves out the site value: $540,000 x 0.80 - $22,000 = $410,000. Adding the $175,000 site gives $585,000.
Option C: $607,000
Option C, $607,000, does not deduct the $22,000 loss: $432,000 + $175,000 = $607,000. Deducting the loss gives $432,000 - $22,000 + $175,000 = $585,000.
Option D: $693,000
Option D, $693,000, uses the full as-completed cost instead of the 80% installed fraction: $540,000 - $22,000 + $175,000 = $693,000. Only $432,000 is supported as installed, giving $585,000.
Fraction first, then loss, then land
Cut the cost to the part actually built, subtract its loss, and finish by adding the land.
How to use: Use this order when a question gives a percentage of cost that applies to a partially completed improvement.
Exam Tip
Watch for a stated percentage that limits the cost base; applying later steps to the full cost is a common trap.
Common Mistakes to Avoid
- -Using the full as-completed cost instead of the installed fraction
- -Forgetting to add the site value
- -Skipping the deduction for the stated loss
Concept Deep Dive
Analysis
This question tests applying a stated installed-cost fraction to a cost base, then deducting a loss and adding site value. The 80% installed-cost fraction defines the cost actually in place, the $22,000 loss applies to that portion, and the site is added at the end. The result leaves completion risk and profit out of account, so it is not a full as-is valuation.
Background Knowledge
The cost approach summation subtracts physical, functional and external depreciation from cost new and adds site value. When only part of a project is in place, the cost base must reflect only the supported installed portion, and a full as-is valuation would also need to consider completion risk and profit.
Real-World Application
A lender asks for a progress review of a house under construction that is supported as 80% complete. The appraiser applies the completed fraction to the as-completed cost, deducts a supported loss on the installed work, and adds site value, while noting that this does not address completion risk.
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?
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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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An appraiser is developing the cost approach for a dwelling using replacement cost. A highly comparable dwelling recently sold for $390,000. At the sale date, its site was worth $110,000 and its improvement cost new was $350,000 on a replacement basis and $410,000 on a reproduction basis. What overall depreciation rate does this sale indicate for the subject?
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