The subject is a dwelling with improvement cost new of $530,000 and site value of $135,000. Its effective age is 12 years and its total economic life is 60 years. Three recent sales of highly comparable dwellings in the same subdivision indicate, by market extraction, total depreciation of 30% of improvement cost new, and the appraiser judges this sales evidence to be adequate. What is the most reliable value indication by the cost approach?
Correct Answer
C) $506,000
When adequate sales data are available, the market method is the most direct and preferred measure, while age-life is an approximation that assumes straight-line loss. So $530,000 × 0.70 + $135,000 = $506,000. Relying on age-life gives $559,000, deducting both estimates double counts and gives $400,000, and applying the 30% to the site as well gives $465,500.
Why This Is the Correct Answer
Option C is correct because extraction indicates $530,000 × 0.70 + $135,000 = $506,000, and it rests on three highly comparable sales. Market evidence reflects the actions of buyers and sellers and is the most direct measure when adequate sales exist. Age-life is an approximation and works better as a cross-check here.
Why the Other Options Are Wrong
Option A: $400,000
Option A shows $400,000, from 530,000 − 106,000 − 159,000 + 135,000. Both methods estimate total depreciation, so deducting both counts the loss twice; extraction alone gives $506,000.
Option B: $465,500
Option B shows $465,500, from (530,000 + 135,000) × 0.70, which applies the rate to the site as well. Land is not generally subject to depreciation, so the correct figure is 530,000 × 0.70 + 135,000 = $506,000.
Option D: $559,000
Option D shows $559,000, from 530,000 × 0.80 + 135,000, the age-life result. It is properly computed but rests on a straight-line assumption, so it should not outweigh adequate market evidence, which gives $506,000.
Markets measure, formulas approximate
When good sales exist, what buyers actually paid carries more weight than a straight-line ratio. Use the formula as a check on the market result.
How to use: Use this when an exam presents age-life and market-extracted depreciation that disagree and asks which to favor.
Exam Tip
Note how the facts describe the sales. Words such as highly comparable and recent point toward giving weight to the market evidence.
Common Mistakes to Avoid
- -Deducting both age-life and extracted depreciation for one property
- -Applying a depreciation rate to the site as well as the improvements
- -Treating an age-life formula as stronger than adequate market evidence
Concept Deep Dive
Analysis
This tests judgment as well as arithmetic. The age-life facts and the sales give different depreciation estimates, so the appraiser must weigh their reliability rather than combine them. Strong market evidence outweighs a formula that assumes depreciation occurs evenly over time, and the rate applies to the improvements alone.
Background Knowledge
The market method takes depreciation from the actions of buyers and sellers, using sales of highly comparable improved properties. The age-life method is simple, but its result relies on a straight-line assumption, and it is best used in combination with another method.
Real-World Application
An appraiser's age-life worksheet shows 20% depreciation on a house in a tract with several recent resales of the same model. Extraction from those sales shows 30%. The appraiser gives more weight to the market result and explains the difference from the formula in the report.
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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