SAEE - Cost Approach and Depreciation Questions and Answers Flashcards
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Physical deterioration that cannot be economically corrected is classified as:
Answer: Incurable physical deterioration
Physical deterioration is incurable when the cost to cure exceeds the contributory value the cure would add.
An appraiser uses the breakdown method to estimate depreciation. Which categories does this method analyze?
Answer: Physical deterioration, functional obsolescence, and external obsolescence
The breakdown method categorizes all depreciation into physical deterioration, functional obsolescence, and external (economic) obsolescence.
If a comparable sale indicates a depreciation rate of 1.5% per year for a similar structure, an appraiser using market extraction would apply this rate to the:
Answer: Reproduction or replacement cost of improvements
The extracted depreciation rate is applied to the estimated reproduction or replacement cost of the subject's improvements.
A building's effective age is less than its chronological age. This most likely indicates:
Answer: The building has been well-maintained or renovated
Good maintenance or recent renovation makes a building appear newer than its actual age, resulting in an effective age below chronological age.
Quantity survey method is the most detailed cost estimation method because it:
Answer: Lists and prices every material, labor hour, overhead cost, and profit separately
The quantity survey method provides the most accurate estimate by tallying every individual cost element of construction.
When the cost approach is most applicable to a new, special-purpose property with no comparable sales, an appraiser relies on it primarily because:
Answer: There is little or no depreciation and no market data to support other approaches
For new special-purpose properties, the cost approach is most reliable because depreciation is minimal and comparable sales are unavailable.
A residential property has a replacement cost of $200,000, accrued depreciation of $40,000, and an estimated land value of $60,000. What is the indicated value by the cost approach?
Answer: $220,000
Cost approach value = replacement cost − depreciation + land value = $200,000 − $40,000 + $60,000 = $220,000.