SRA Cost Approach & Depreciation Analysis 1 — Questions and Answers
Question 1: What are the three types of accrued depreciation recognized in the cost approach to value?
- Physical deterioration, functional obsolescence, external obsolescence (Correct answer)
- Structural decay, economic decline, market obsolescence
- Deferred maintenance, design deficiency, neighborhood decline
- Curable depreciation, incurable depreciation, hidden depreciation
Correct answer: Physical deterioration, functional obsolescence, external obsolescence
The cost approach recognizes three types of accrued depreciation: physical deterioration, functional obsolescence, and external (economic) obsolescence.
Question 2: What is the key distinction between reproduction cost and replacement cost in the cost approach?
- Reproduction cost uses modern materials; replacement cost uses original materials
- Reproduction cost is the cost to build an exact replica; replacement cost uses modern materials and methods for equivalent utility (Correct answer)
- Reproduction cost applies to land; replacement cost applies to improvements only
- There is no meaningful difference between the two concepts in residential appraisal
Correct 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.
Question 3: Which depreciation estimation method calculates accrued depreciation as the ratio of effective age to total economic life?
- Sales extraction method
- Market extraction method
- Age-life method (Correct answer)
- Observed condition method
Correct 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.
Question 4: How is 'functional obsolescence' defined in residential appraisal practice?
- Physical wear and tear from normal use over time
- A loss in value due to factors located external to the property
- A loss in value caused by deficiencies or superadequacies in the property's design or features relative to market standards (Correct answer)
- Depreciation resulting solely from deferred maintenance
Correct 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.
Question 5: External obsolescence in the cost approach is best characterized as:
- Always curable through property renovation
- Generally incurable and caused by factors located outside the property boundaries (Correct answer)
- A result of poor original construction quality
- Limited to properties located within designated flood zones
Correct 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.
Question 6: Which cost estimating method multiplies a unit cost per square foot by the structure's gross living area to estimate building cost?
- Segregated cost method
- Comparative unit method (Correct answer)
- Quantity survey method
- Unit-in-place method
Correct 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.
Question 7: What does 'effective age' represent in residential appraisal?
- The actual chronological age of the structure since construction
- The age indicated by the condition and utility of the structure, which may differ from its chronological age (Correct answer)
- The remaining economic life of the structure
- The date on which the structure was most recently renovated
Correct 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.
SRA Cost Approach & Depreciation Analysis 1
What are the three types of accrued depreciation recognized in the cost approach to value?