An appraiser is developing the cost approach for a dwelling built in 1920. Reproduction cost new is $780,000, which includes $90,000 for extra-thick masonry walls that add no value and no added cost of ownership. Replacement cost new is $690,000, which excludes those walls. Accrued depreciation, estimated against replacement cost, is $120,000. Site value is $230,000. What value does the cost approach indicate?
Correct Answer
B) $800,000
The $120,000 of depreciation was estimated against replacement cost, so it pairs with $690,000: $690,000 − $120,000 + $230,000 = $800,000. Pairing reproduction cost with this depreciation leaves the $90,000 of superadequate walls in the value and gives $890,000. Omitting depreciation gives $920,000, and leaving out the site value gives $570,000.
Why This Is the Correct Answer
Option B is correct because the depreciation was estimated against replacement cost, so it pairs with $690,000. Deducting $120,000 gives $570,000, and adding the $230,000 site gives $800,000. Starting from reproduction cost and deducting the $90,000 superadequacy as well as the $120,000 reaches the same figure.
Why the Other Options Are Wrong
Option A: $570,000
Option A, $570,000, leaves out the site value: $690,000 - $120,000 = $570,000. The cost approach adds the $230,000 site value to the depreciated replacement cost, giving $800,000.
Option C: $890,000
Option C, $890,000, starts from reproduction cost: $780,000 - $120,000 + $230,000 = $890,000. The $120,000 was estimated against replacement cost, so pairing it with reproduction cost leaves the $90,000 of superadequate walls in the value; the correct total is $800,000.
Option D: $920,000
Option D shows $920,000, from 690,000 + 230,000, which leaves out the $120,000 of accrued depreciation. Deducting it gives $800,000.
Left out, not deducted
If a superadequate item was left out of cost new, its cost is not deducted again. If it was included in cost new, its cost has to come out through depreciation.
How to use: Use this when a problem gives both reproduction and replacement figures, to decide whether a superadequacy's cost needs its own deduction.
Exam Tip
Before you calculate, identify the basis on which the depreciation was measured. Then start from the matching cost figure.
Common Mistakes to Avoid
- -Pairing depreciation measured on replacement cost with the reproduction cost figure
- -Leaving the site value out of the cost approach indication
- -Omitting accrued depreciation after selecting the right cost base
Concept Deep Dive
Analysis
This tests whether the cost base and the depreciation figure belong together. Two cost figures are available, but the depreciation was estimated against replacement cost. Because replacement cost already excludes the superadequate walls, no separate deduction for their cost is needed here.
Background Knowledge
Reproduction cost prices a replica of the existing improvements, while replacement cost prices a property of equivalent utility and excludes features a substitute would not include. The measure of depreciation can depend on which basis is used and on whether the item was included in cost new.
Real-World Application
An appraiser values an older masonry house whose thick walls would not be built today. Using replacement cost, the appraiser prices a modern equivalent and does not deduct the cost of the extra wall thickness again. The workfile records why reproduction cost was not the starting figure.
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
Current cost new is 2,400 sf×$175/sf with all relevant cost components included. Deduct supported total improvement depreciation $105,000, then add supported site $190,000. No further deductions apply. What cost indication results?
Next Question
A suitable cost index is used to trend a historical construction cost of $300,000, for the same scope of work, from index 180 to index 270. Total depreciation of the improvements is $85,000, and the site value is $120,000. What value does the cost approach indicate?