INTRODUCING THE COST APPROACH

Chapter 11

Base cost

Builder’s profit

Building shell

Building size and shape

Comparative square-foot

method

Construction classification

Cost approach

Cost manuals

Design type or Use type

Developer or entrepreneurial

profit

Direct costs

Historic costs

Index method

Indirect costs

Lump-sum costs

Quantity survey method

Replacement cost

Reproduction cost

Story height

Unit-in-place method

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CHAPTER TERMS AND CONCEPTS

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 building’s total costs.

5. Name the important site, location, and design features that influence the construction costs of a building.

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WHAT DOES COST MEAN?

For Business and Accounting

COST =

Price

Wholesale Price

Retail Price

Original Price

Book Cost

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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.

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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.

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Defining Reproduction Cost Estimates

• The cost of a duplicate or nearly identical structure, every physical component must be included.

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Defining Replacement Cost Estimates

• the cost to build a structure of similar utility.

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REPRODUCTION VS REPLACEMENT COST

Reproduce a Replica

Subject Property

Replace the Utility

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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.

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13

STEPS IN THE COST APPROACH

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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 Contractor’s method

o Carpentry (Rough & Finish)o Plumbing (Rough & Finish)o Grading (off and on Sites)o Electrical Worko Roofing, etc.

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DIRECT COST ELEMENTS

Construction Costs Include:

Direct Costs Labor

Material

Equipment

Design & Engineering

Subcontractor’s Fees

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INDIRECT COST ELEMENTS

Indirect Costs Legal Fees, Appraisals, etc.

Interest

Insurance

Taxes

Overhead & Profit

Selling Costs

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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

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Example 11-5

Effect of Shape on Square-Foot Costs

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Example 11-6

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TYPICAL HOUSES SHAPES

Using Online Cost Services

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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.

SUMMARY

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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.