Cost Approach & Depreciation Analysis Flashcards
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Read the first 7 Cost Approach & Depreciation Analysis flashcards as text
A superadequacy in a property is best described as:
Answer: An over-improvement whose cost exceeds the value it contributes to the property
A superadequacy is an excess feature — such as an oversize HVAC system or elaborate elevator in a small building — whose cost exceeds its contribution to market value, creating incurable functional obsolescence.
Which of the following is the correct formula for the cost approach to value?
Answer: Land Value + Reproduction/Replacement Cost New – Accrued Depreciation
The cost approach formula is: Value = Land Value + Cost New of Improvements – Accrued Depreciation, combining the separately estimated land value with depreciated improvement value.
Observed condition depreciation (also called the observed condition method) requires the appraiser to:
Answer: Physically inspect and rate each component of the building to estimate depreciation directly
The observed condition method requires direct physical inspection of every building component, allowing the appraiser to assign depreciation based on actual observed conditions rather than age-based formulas.
Market extraction is used in the cost approach primarily to:
Answer: Derive depreciation estimates from analysis of comparable improved property sales
Market extraction derives total accrued depreciation from market sales of improved properties by subtracting the estimated land value and cost new from the sales prices of comparable properties.
Which of the following would be classified as external (economic) obsolescence affecting a residential property?
Answer: A new industrial facility constructed adjacent to the neighborhood
An adjacent industrial facility is an external negative influence outside the property that reduces its value, making it a classic example of external (economic) obsolescence.
The remaining economic life of an improvement is best defined as:
Answer: The number of years until the structure will no longer contribute positively to property value
Remaining economic life is the estimated period during which the improvements will continue to contribute positively to total property value, and is equal to total economic life minus effective age.
When is the cost approach generally considered the most reliable valuation method?
Answer: When the improvements are new or when the property type is rarely sold (e.g., schools, churches)
The cost approach is most reliable for new construction (minimal depreciation to estimate) and for special-use properties with few comparable sales, where market and income approaches have insufficient data.