An appraiser using the modified age-life method has identified curable items of depreciation. How are those items handled?
Correct Answer
A) Remove those items from the ratio base and value them separately.
The modified age-life method treats curable items separately and applies the age-life ratio to the remaining cost. This helps avoid counting those losses twice. It does not prescribe doubling ratios, using chronological age in place of effective age, or omitting land.
Why This Is the Correct Answer
Option A is correct because when the ratio is defined on cost after separately treated curable items, those items are deducted from the ratio base and measured on their own. The age-life ratio is then applied to the remainder, which avoids counting the curable losses twice.
Why the Other Options Are Wrong
Option B: Double the depreciation ratio for older properties.
Option B, doubling the depreciation ratio for older properties, is not part of the modified age-life method. The method changes the base to which the ratio applies, not the ratio's size.
Option C: Substitute chronological age for effective age in the ratio base.
Option C, substituting chronological age for effective age, does not follow. The modified method still uses a supported effective age in the ratio; what changes is the cost base after curable items.
Option D: Exclude the site value from the cost approach indication.
Option D, excluding the site value from the cost approach indication, does not follow. Site value is still added in the cost approach; the modified method concerns only how improvement depreciation is measured.
Cure first, then ratio the rest
Take the curable items out of the pot first, then apply the age-life ratio only to what is left in the pot.
How to use: Use this when a question mentions a ratio applied after curable items are treated separately.
Exam Tip
When a method separates some losses, check that the remaining ratio is applied to a base that excludes them.
Common Mistakes to Avoid
- -Applying the age-life ratio to full cost new and also deducting curable items
- -Replacing effective age with actual age in the ratio
- -Leaving land out of the cost approach indication
Concept Deep Dive
Analysis
This question tests the modified age-life method, in which curable items are handled separately and the age-life ratio is applied only to the remaining cost. The reason is to avoid charging the same loss twice.
Background Knowledge
The modified age-life method first deducts curable physical and functional items, then applies the effective age to economic life ratio to the remaining cost. This links the age-life idea with the breakdown concept of measuring items individually and adding them, while avoiding double counting.
Real-World Application
An appraiser identifies worn carpet and peeling paint as curable items with a supported cost to cure. The appraiser deducts those amounts, then applies the effective age to economic life ratio to the rest of cost new so that the carpet and paint are not depreciated twice.
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?
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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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Improvement cost new $540,000 has total loss $80,000. Primary site value $190,000 expressly excludes an independently marketable excess parcel. That parcel is 0.50 acre at a supported net unit value $120,000/acre, with no additional division, sale or holding costs. Add the nonoverlapping values. What total results?