introducing the cost approach chapter 11. base cost builder’s profit building shell building size...
TRANSCRIPT
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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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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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
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.