The hard and soft costs of the improvements are $460,000 and $40,000, and together they include all required costs. Physical deterioration is estimated at 22% of their sum. External obsolescence of $15,000, attributable only to the improvements, is separate and does not overlap the physical deterioration. The site value, which already reflects site influences, is $145,000. What is the indicated value by the cost approach?
Correct Answer
C) $520,000
(460000+40000)×0.78−15000+145000=520000. Use the full cost buildup and apply the loss to that total. Common errors: leaving out the site value gives $375,000; leaving out the $15,000 external loss gives $535,000; leaving out the soft costs gives $488,800.
Why This Is the Correct Answer
Option C is correct because total cost new is $460,000 + $40,000 = $500,000, and 78% of that (100% minus 22% physical loss) is $390,000. Subtracting the separate $15,000 external loss gives $375,000, and adding the $145,000 site value gives $520,000. This uses the full cost buildup and deducts each nonoverlapping loss once.
Why the Other Options Are Wrong
Option A: $375,000
Option A, $375,000, is the depreciated improvement amount before the site is added: ($460,000 + $40,000) x 0.78 - $15,000 = $375,000. The cost approach adds site value, so $375,000 + $145,000 = $520,000 is the total indication.
Option B: $488,800
Option B, $488,800, comes from leaving out the $40,000 soft costs: $460,000 x 0.78 - $15,000 + $145,000 = $488,800. The stem says hard and soft costs together make up all required costs, so the base must be $500,000, giving $520,000.
Option D: $535,000
Option D, $535,000, leaves out the $15,000 external loss: ($460,000 + $40,000) x 0.78 + $145,000 = $535,000. The stem calls that loss separate and nonoverlapping, so it must also be deducted, giving $520,000.
Build, Wear, Outside, Dirt
Build the full cost (hard plus soft), take off wear (physical), take off outside losses (external), then add the dirt (site). Four steps in that order.
How to use: Use this sequence whenever a cost problem lists cost components, several depreciation items and a site value.
Exam Tip
When a percentage loss is stated as a share of the sum of hard and soft costs, multiply the combined total, not just the hard costs. Then check that each listed item, including site, appears once in your arithmetic.
Common Mistakes to Avoid
- -Applying the percentage loss to hard costs only and ignoring soft costs
- -Forgetting to add the site value at the end
- -Skipping a separate external obsolescence deduction
Concept Deep Dive
Analysis
This question tests whether you can build a cost-approach indication in the right order from a hard and soft cost buildup. Add hard and soft costs to get total cost new, apply the 22% physical loss to that full sum, subtract the separate external loss, and then add the site value. Each step uses the base the stem specifies, so no figure should be skipped or applied to the wrong base.
Background Knowledge
Full cost new includes both direct (hard) costs and indirect (soft) costs, plus entrepreneurial incentive where the market supports it. Depreciation is then deducted for physical, functional and external causes, and the separately valued site is added. Percent good is the complement of a percentage depreciation, so a 22% loss leaves 78% of cost new.
Real-World Application
An appraiser valuing a new custom home receives a builder's hard-cost budget and a separate list of permits, fees and design costs. She combines both into total cost new, applies the physical depreciation she has supported, deducts a market-measured loss from a nearby highway, and adds the site value from land sales.
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 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?
Next Question
The subject improvements have a current replacement cost new of $360,000. Accrued depreciation from all causes is $72,000, and land value is $90,000. These figures include all necessary cost components and depreciation. What is the indicated property value?