Chapter 11 INTRODUCING THE COST APPROACH CHAPTER TERMS AND CONCEPTS Base cost Direct costs Builders profit Historic costs Building shell

Index method Building size and shape Indirect costs Comparative square-foot Lump-sum costs method

Quantity survey method Construction classification Replacement cost Cost approach Reproduction cost Cost manuals Story height

Design type or Use type Unit-in-place method Developer or entrepreneurial profit 2 LEARNING OUTCOMES 1. List the five basic steps in the cost approach.

2. Define the terms reproduction cost and replacement cost, and explain their use in appraisals. 3. Name four methods of estimating costs and explain when each is used. 4. List the direct and indirect costs that make up a buildings total costs. 5. Name the important site, location, and design features that influence the

construction costs of a building. WHAT DOES COST MEAN? For Business and Accounting COST = Price Wholesale Price

Retail Price Original Price Book Cost WHAT DOES COST MEAN?

For Appraisal COST = Cost on Value Date Typical Cost

Consumer Level Cost Cost as New Steps in the Cost Approach 1. Estimate the value of the land as if vacant and available for use. Generally, this is accomplished by the market comparison approach. 2. Estimate the total cost to reproduce or replace the existing improvements as of the date of value. 3. Decide on appropriate amounts for accrued depreciation (loss in

the market value of the improvements). 4. Deduct the accrued depreciation from the cost new of the improvements. 5. Add the depreciated cost of the improvements to the estimated land value, in order to arrive at the property value as indicated by the cost approach. COST ESTIMATES IN APPRAISALS Generalized Economic Costs: 1. Cost levels as of the date of value, not book costs or historic costs for the building. 2. Typical costs to build a building, rather than the actual construction costs. These two costs could

be the same, of course. 3. Costs that include all of the charges to the consumer, not just the cost to the developer or builder. All-inclusive costs are sometimes referred to as turn-key costs, where all that the first occupant has to do is to turn the key and move in. Defining Reproduction Cost Estimates The cost of a duplicate or nearly identical structure, every physical component must

be included. Defining Replacement Cost Estimates the cost to build a structure of similar utility. REPRODUCTION VS REPLACEMENT COST Subject Property Reproduce a Replica Replace the Utility

10 PRIMARY PURPOSES OF THE COST APPROACH Value a New Property Value Special Use Properties Use as a Check Against Other Approaches COST-ESTIMATING METHODS 1. The comparative square-foot (or comparative unit) method.

2. The unit-in-place method. 3. The index (or cost service index) method. 4. The quantity survey method. STEPS IN THE COST APPROACH 13 FOUR COST METHODS Comparative Square Foot Price per square foot Unit-in-Place Price per section of improvements

Index Price according to original cost Quantity Survey Contractors method o o o o o Carpentry (Rough & Finish) Plumbing (Rough & Finish) Grading (off and on Sites)

Electrical Work Roofing, etc. DIRECT COST ELEMENTS Construction Costs Include: Direct Costs Labor Material Equipment Design & Engineering Subcontractors Fees

INDIRECT COST ELEMENTS Indirect Costs Legal Fees, Appraisals, etc. Interest Insurance Taxes Overhead & Profit Selling Costs PRIMARY COST VARIABLES What Affects Construction Costs? Design or Use-Type Construction Class

Quality Size Shape Height Yard Improvements The Effect of Size on Square-Foot Costs Example 11-5 Effect of Shape on Square-Foot Costs Example 11-6

TYPICAL HOUSES SHAPES 20 Using Online Cost Services The increased use of office computers and online data services by appraisers has extended to the task of cost estimating. A number of construction cost providers offer online services that can calculate and report building cost estimates upon order,

using specifications that are input by the user. 21 SUMMARY Cost estimating plays a role in each of the three approaches to value. In appraisals, the concept of cost is related to its economic impact. This means that cost estimates are made at price levels as of the date of value. Also, they must reflect the total amount of typical costs that are passed on to consumers. The cost approach is used primarily to estimate

the value of nearly new, new, or special-use properties. It can also be a check against the other value approaches. Manuals and cost services provide average cost figures for many types of buildings and can be expected to include photographs, specifications, and cost-estimating techniques as well.

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