The cost approach formula is: Value = Replacement or Reproduction Cost - Accumulated Depreciation + Land Value. Accumulated depreciation includes three types: physical deterioration (wear and tear), functional obsolescence (outdated design), and external/economic obsolescence (negative factors outside the property). Land value is estimated separately because land does not depreciate.
An appraiser determines that a 20-year-old warehouse would cost $500,000 to replace. Accumulated depreciation is $150,000. The land is valued at $120,000. Property value = $500,000 - $150,000 + $120,000 = $470,000.
Know the formula: Cost New minus Depreciation plus Land Value. Remember the three types of depreciation—physical deterioration, functional obsolescence, and external obsolescence. External obsolescence is the only type that is always incurable and is never the property owner's fault.
Related Terms
Related Concepts
Depreciation is an accounting method of allocating the cost of an asset over its useful life, allowing investors to deduct a portion of the asset's cost each year.
The income approach estimates a property's value based on the income it generates by converting net operating income into a value estimate using a capitalization rate. It is the preferred method for income-producing properties.
Highest and best use is an appraisal concept that identifies the most profitable, legally permitted, physically possible, and financially feasible use of a property. It is the foundation of all property valuation.
The comparable sales approach estimates a property's value by comparing it to similar properties that have recently sold in the same market area. It is the most widely used and reliable approach for appraising residential properties.
Reconciliation is the final step in the appraisal process where the appraiser analyzes the value indications from all applicable approaches and arrives at a single final opinion of value. It is not a simple average of the three values.
Frequently Asked Questions
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