SRA Cost Approach & Depreciation Analysis 2 — Questions and Answers
Question 1: The quantity survey method of cost estimation is considered which of the following?
- The least accurate but fastest method for residential appraisals
- The most comprehensive and most time-consuming cost estimating method (Correct answer)
- Only applicable to commercial and industrial properties
- A simplified version of the unit-in-place method
Correct answer: The most comprehensive and most time-consuming cost estimating method
The quantity survey method is the most detailed cost estimating approach, requiring itemization of every material and labor component, making it the most accurate but also the most time-consuming.
Question 2: A 'superadequacy' in the context of functional obsolescence refers to:
- A feature that is absent from the property but required by current market standards
- A feature that exceeds what the current market demands, resulting in a cost that cannot be fully recouped in value (Correct answer)
- An improvement that exceeds local building code requirements
- A property that is priced above the average for its market area
Correct answer: A feature that exceeds what the current market demands, resulting in a cost that cannot be fully recouped in value
A superadequacy is an excess feature whose cost to include exceeds its contribution to market value, creating functional obsolescence because the market will not pay for the over-improvement.
Question 3: In the cost approach, how is land value treated?
- It is folded into the total building cost estimate
- It is estimated separately and then added to the depreciated cost of improvements (Correct answer)
- It is estimated using income capitalization techniques
- It is considered irrelevant to the cost approach conclusion
Correct answer: It is estimated separately and then added to the depreciated cost of improvements
In the cost approach, land is valued separately (typically via the sales comparison approach) and added to the depreciated improvement cost to arrive at total property value.
Question 4: Which best describes 'incurable' physical deterioration?
- Deferred maintenance items that a prudent buyer would correct upon purchase
- Physical deficiencies where the cost to remedy exceeds the value the cure would add to the property (Correct answer)
- Normal wear and tear visible on interior finishes and surfaces
- Damage caused specifically by a natural disaster event
Correct answer: Physical deficiencies where the cost to remedy exceeds the value the cure would add to the property
Incurable physical deterioration exists when the cost to correct the deficiency is greater than the resulting increase in property value, making repair economically unjustified.
Question 5: The unit-in-place method estimates building costs by:
- Applying a single published cost per square foot to the total building area
- Pricing each major building component separately to include both material and installation costs (Correct answer)
- Conducting a full itemized quantity survey of all construction materials
- Comparing the subject's building cost to recent comparable property sales
Correct answer: Pricing each major building component separately to include both material and installation costs
The unit-in-place method prices each major component of the structure—foundation, framing, roofing, mechanical systems, etc.—separately to capture both material and labor costs for each element.
Question 6: When using the market extraction (sales extraction) method to estimate depreciation, an appraiser:
- Uses standardized depreciation tables published in cost manuals
- Calculates depreciation by dividing effective age by total economic life
- Derives depreciation from analysis of actual comparable market sales (Correct answer)
- Applies a fixed annual percentage to the building's original construction cost
Correct answer: Derives depreciation from analysis of actual comparable market sales
The market extraction method estimates depreciation by analyzing comparable sales to extract the implied total depreciation (sale price minus land value minus cost new) from market transactions.
Question 7: What is 'remaining economic life' as used in the cost approach?
- The actual chronological age subtracted from an assumed 100-year total lifespan
- The estimated period during which the improvements will continue to contribute positively to overall property value (Correct answer)
- The number of years until the property requires a complete structural renovation
- The remaining term on the property's existing mortgage financing
Correct answer: The estimated period during which the improvements will continue to contribute positively to overall property value
Remaining economic life is the appraiser's estimate of how many additional years the improvements are expected to generate a contribution to total property value.
SRA Cost Approach & Depreciation Analysis 2
The quantity survey method of cost estimation is considered which of the following?