The cost new of the subject dwelling is $480,000, and total depreciation of the building is estimated at 25%. Site improvements, valued separately on an as-is basis, contribute $35,000, and the land, excluding those improvements, is valued at $150,000. None of these amounts overlap. What is the indicated value by the cost approach?
Correct Answer
C) $545,000
480000×0.75+35000+150000=545000. Common errors: leaving out the land value gives $395,000; leaving out the as-is site improvements gives $510,000; not deducting the 25% building loss gives $665,000.
Why This Is the Correct Answer
Option C is correct because the building is depreciated by 25%, leaving $480,000 × 0.75 = $360,000. Adding the $35,000 as-is site improvements and the $150,000 land gives $545,000.
Why the Other Options Are Wrong
Option A: $395,000
Option A, $395,000, leaves out the land value: $360,000 + $35,000 = $395,000. Adding the $150,000 land gives $545,000.
Option B: $510,000
Option B, $510,000, leaves out the as-is site improvements: $360,000 + $150,000 = $510,000. Adding the $35,000 site improvements gives $545,000.
Option D: $665,000
Option D, $665,000, does not deduct the 25% building loss: $480,000 + $35,000 + $150,000 = $665,000. With the loss applied, the building contributes $360,000 and the total is $545,000.
Building, Extras, Land
Total = Depreciated building + As-is site improvements + Land. Apply the building loss only to the building.
How to use: Use this three-part sum for cost approaches with separate site improvements.
Exam Tip
Apply each loss only to the component it is stated for, and confirm each listed component is added once.
Common Mistakes to Avoid
- -Leaving out land value
- -Forgetting as-is site improvements
- -Applying the building depreciation to the whole total
Concept Deep Dive
Analysis
This question tests assembling a cost approach with separate components: depreciated building, as-is site improvements and land. The 25% loss applies only to the building, and the other two items are added at their stated values because none of the costs overlap.
Background Knowledge
In a residential cost approach, the depreciated cost of the building is added to the as-is value of site improvements and the site value. Site improvements such as driveways and landscaping are often estimated separately on an as-is basis. Keeping components separate avoids both omissions and double counting.
Real-World Application
An appraiser depreciates a $480,000 house by 25%, adds $35,000 for the as-is driveway, fencing and landscaping, and adds $150,000 for the land. The cost approach indicates $545,000.
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
An improvement has an effective age of 21 years and a total life of 70 years. Using straight-line age-life depreciation, what is the percentage of physical depreciation?
Next Question
An improvement had a historical cost of $280,000. A suitable cost index for the same scope of work has moved from 160 to 240. Total depreciation is 25% of the trended cost, and site value is $190,000. What value does the cost approach indicate?