Which is the basic cost-approach summation?
Correct Answer
A) Supported site value plus improvement cost new less applicable improvement depreciation.
The basic summation is supported site value plus improvement cost new less applicable nonoverlapping depreciation. Construction-period financing and entrepreneurial incentive can belong in the cost basis when supported; they are not categorically excluded. Sale price extraction is a different operation.
Why This Is the Correct Answer
Option A is correct because in the cost approach, value is estimated by adding the land or site value to the cost new of the improvements less depreciation. That summation gives a value indication for the total property.
Why the Other Options Are Wrong
Option B: Improvement cost new minus the land value of the site.
Option B subtracts land value from improvement cost new. In the cost approach, site value is added, not subtracted, and depreciation must be deducted from cost new.
Option C: Sale price minus land value plus accrued depreciation, used as the standard cost summation.
Option C starts with sale price, subtracts land and adds accrued depreciation. That resembles a sale-price extraction step used to study depreciation, not the standard cost summation.
Option D: Cost new plus land minus the current mortgage balance.
Option D subtracts the current mortgage balance from cost new plus land. Financing balances are not part of the cost approach and do not measure property value.
Land Plus Building Minus Wear
Site value plus cost new minus depreciation. Land is added, depreciation is subtracted, and nothing else enters the basic formula.
How to use: Use this formula to check any cost-approach answer choice.
Exam Tip
Eliminate options that subtract land or involve a mortgage balance; the basic summation adds site value.
Common Mistakes to Avoid
- -Subtracting land value instead of adding it
- -Confusing depreciation extraction with the cost summation
- -Deducting a loan balance from the value indication
Concept Deep Dive
Analysis
This question tests the basic formula of the cost approach. Value is estimated by adding site value to the cost new of improvements less depreciation. The other choices either subtract land, use sale price, or bring in financing.
Background Knowledge
The cost approach rests on the principle of substitution: a buyer would pay no more than the cost to acquire a site and build an equally desirable substitute. Supported indirect costs, including construction-period financing and entrepreneurial incentive, can belong in cost new.
Real-World Application
An appraiser completing a cost approach on a newer home estimates site value from lot sales, prices the dwelling with a cost manual, and deducts modest physical depreciation. The sum supports her other approaches in reconciliation.
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
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?
Next Question
Direct and indirect improvement costs total $340,000, excluding entrepreneurial incentive. The separately supported incentive is 12% of that stated base and is not included elsewhere. What total improvement cost new results?