Cost Approach & Depreciation Analysis Flashcards

What are the three types of accrued depreciation recognized in the cost approach to value?

Answer: Physical deterioration, functional obsolescence, external obsolescence

The cost approach recognizes three types of accrued depreciation: physical deterioration, functional obsolescence, and external (economic) obsolescence.

What is the key distinction between reproduction cost and replacement cost in the cost approach?

Answer: Reproduction cost is the cost to build an exact replica; replacement cost uses modern materials and methods for equivalent utility

Reproduction cost is the cost to construct an exact replica of the existing structure, while replacement cost estimates the cost to build a functionally equivalent structure using current materials and methods.

Which depreciation estimation method calculates accrued depreciation as the ratio of effective age to total economic life?

Answer: Age-life method

The age-life method estimates accrued depreciation by dividing the improvement's effective age by its total economic life and applying that ratio to the cost new.

How is 'functional obsolescence' defined in residential appraisal practice?

Answer: A loss in value caused by deficiencies or superadequacies in the property's design or features relative to market standards

Functional obsolescence is a loss in value caused by deficiencies or superadequacies in the property's design, layout, or features compared to what the current market demands.

External obsolescence in the cost approach is best characterized as:

Answer: Generally incurable and caused by factors located outside the property boundaries

External (economic) obsolescence is generally incurable because it results from negative influences outside the property, such as neighborhood decline, proximity to nuisances, or adverse economic conditions.

Which cost estimating method multiplies a unit cost per square foot by the structure's gross living area to estimate building cost?

Answer: Comparative unit method

The comparative unit method (square foot method) estimates construction cost by applying a cost per square foot derived from comparable structures to the total area of the subject building.

What does 'effective age' represent in residential appraisal?

Answer: The age indicated by the condition and utility of the structure, which may differ from its chronological age

Effective age reflects the condition and utility of the structure as observed by the appraiser, and may be less than or greater than the actual chronological age depending on maintenance and updates.