Quiz 08: Cost Approach to Value

The length of time an improvement will contribute to the value of a property is called: A. enhancement potential B. physical life C. economic life D. all of the above

The correct answer is C.Review section "B. AGEN AND ECONOMIC LIFE" for details.Improvements are said to have an ECONOMIC LIFE (also called useful life), which is the length of time during which the improvement will contribute to the value of the property.

.Estimating the amounts of each type of depreciation separately is called: A. the observed condition method B. the breakdown method C. the capitalization method D. both A and B

The correct answer is D.Review section "E. OBSERVED CONDITION METHOD" for details.In the OBSERVED CONDITION METHOD (also known as the breakdown method), the appraiser estimates the amounts of each of the types of depreciation separately.

When valuing improvements to a site, the Cost Approach Method takes into consideration: A. the value of the site B. the cost to construct new improvements C. the depreciation the improvements have suffered D. all of the above

The correct answer is D.Review section "I. BASICS OF THE COST APPROACH" for details.The COST APPROACH METHOD is a process which assumes that the value of improved property is indicated by the value of the site, plus the cost (new) to construct the improvements, less any depreciation affecting the improvements.

Which of the following methods involves an appraiser measuring quantities of various building components and multiplying their costs? A. Comparative unit method B. Market analysis method C. Unit-in-place method D. Quantity Survey method

Review section "B. UNIT-IN-PLACE METHOD " for details.The UNIT-IN-PLACE METHOD requires the appraiser to identify the quantities of various building components, such as foundation, floor, walls, roof, doors, windows, etc. The quantity of each item is then multiplied by its appropriate unit cost, and the subtotals for the building components are added together to get the total cost.

In the _____ method, cost is estimated on the basis of the square footage of building area. A. comparative unit method B. unit in placement method C. cost index trending method D. quantity survey method

The correct answer is A.Review section "A. COMPARATIVE UNIT METHOD" for details.In the COMPARATIVE UNIT METHOD cost is estimated on the basis of the square footage of building area, or the cubic footage of building volume. Residential cost estimates using this technique almost always use square footage, so it is often referred to as the square foot method.

The amount of depreciation occurring between the time an improvement was built and the effective date of appraisal is called: A. accrued depreciation B. time lapse depreciation C. old age adjustments D. all of the choices

The correct answer is A.Review section "A. DEPREICATION TERMINOLOGY" for details.Depreciation is the difference between the market value of the improvement and its cost.The amount of depreciation that has occurred between the time the improvement was built and the effective date of the appraisal is called the ACCRUED DEPRECIATION.

Using the economic age-life method, a graph of depreciated value of an improvement versus its age will appear as: A. a straight line B. a broken line C. a downward sloping line D. an upward sloping line

The correct answer is A.Review section "A. ECONOMIC AGE-LIFE METHOD " for details.The economic age-life method is sometimes called the "straight-line method."

If the cost to correct a problem related to deferred maintenance is less than the increase in value achieved by the correction, the problem is considered: A. curable physical deterioration B. incurable physical deterioration C. curable functional obsolescence D. incurable functional obsolescence

The correct answer is A.Review section "A. PHYSICAL DETERIOATION " for details.PHYSICAL DETERIORATION is depreciation that is caused by wear and tear of, or damage to, the physical components of the improvement.Physical deterioration can be curable or incurable.

The gutters on a large Victorian home need to be replaced because they are worn out. The gutters used in the original construction are no longer ready-made. Because they have to be special-ordered, the cost to replace them exceeds the added market value. This is an example of: A. incurable physical deterioration B. curable physical deterioration C. incurable functional obsolescence D. curable functional obsolescence

The correct answer is A.Review section "A. PHYSICAL DETERIOATION" for details.Review section "A. PHYSICAL DETERIOATION" for details.PHYSICAL DETERIORATION is depreciation that is caused by wear and tear of, or damage to, the physical components of the improvement.Physical deterioration can be curable or incurable. In this example it is incurable

The cost to create an exact replica of a building at current prices, using the same materials, design, layout, and level of craftsmanship, including its deficiencies, is called: A. reproduction cost B. duplication cost C. mirror imaging cost D. replacement cost

The correct answer is A.Review section "A. REPRODUCTION AND REPLACEMENT COST" for details.REPRODUCTION COST is obtained by estimating the cost to create an exact replica of the improvements, at current prices, using the same materials, design, layout and level of craftsmanship, and embodying all the deficiencies, superadequacies and obsolescence of the subject building.

The break down method of estimating depreciation is also known as A. The observed condition method B. The Sales data method C. The Rental loss method D. The Cost to cure method

The correct answer is A.Review section "E. OBSERVED CONDITION METHOD" for details.The OBSERVED CONDITION METHOD (also known as the breakdown method), the appraiser estimates the amounts of each of the types of depreciation separately. When estimating the various types of depreciation, the appraiser may utilize straight-line, sales comparison, and capitalization techniques, as well as cost to cure estimates.

External or economic obsolescence is generally regarded as: A. incurable B. curable C. either curable or incurable D. neither curable nor incurable

The correct answer is A.Review section "VI. TYPES OF DEPRECIATION" for details.Depreciation can be curable or incurable. If depreciation can be remedied, it is said to be "curable." If a remedy is NOT possible or practical, the depreciation is "incurable."External or economic obsolescence is generally regarded as "incurable obsolescence" since the property owner has no control over the forces outside his or her property.

Worn out carpeting in a house would most likely fall into the category of: A. curable physical deterioration B. incurable physical deterioration C. curable functional obsolescence D. incurable functional obsolescence

The correct answer is A.Review section "VI. Types of Depreciation " for details.PHYSICAL DETERIORATION is depreciation that is caused by wear and tear of, or damage to, the physical components of the improvement. Broken windows, leaky roofs, peeling paint, termite damage or worn carpeting are all examples of physical deterioration.If the cost to correct the deterioration is less than the added value that would result from the correction, then it is CURABLE. In this case it would be considered curable.

The loss in value of an improvement, due to any reason whatsoever, is referred to as: A. necessary loss B. depreciation C. degradation D. diminished value

The correct answer is B.Review section "A. DEPRECIATION TERMINOLOGY" for details.For purposes of appraisal, the term DEPRECIATION refers to a loss in the value of an improvement (as compared to its cost) due to any reason whatsoever.

Effective age is best defined as A. The actual age divided by the age of life B. The age of a building with similar condition and utility C. The average age D. The chronological age

The correct answer is B.Review section "B. AGE AND ECONOMIC LIFE" for details.EFFECTIVE AGE is the apparent or functional age of the improvement, based on the amount of observed deterioration and obsolescence. Effective age may be the same as actual age, or it may be greater or less than actual age. Effective age is related to remaining economic life

The length of time an improvement is expected to last with normal maintenance is called its: A. economic life B. physical life C. optimal maintained life D. interim lie

The correct answer is B.Review section "B. AGE AND ECONOMIC LIFE" for details.PHYSICAL LIFE, which is the length of time that an improvement would be expected to last with normal maintenance.

The apparent or functional age of an improvement, based on its current conditions and those of the market is called: A. actual age B. effective age C. physical age D. contract age

The correct answer is B.Review section "B. AGEN AND ECONOMIC LIFE" for details.EFFECTIVE AGE is the apparent or functional age of the improvement, based on the amount of observed deterioration and obsolescence it has sustained. Effective age may be the same as actual age, or it may be greater or less than actual age. Effective age is related to remaining economic life.

The amount an owner/developer expects to make from improving a property is called: A. actual profit B. entrepreneurial profit C. secret profit D. franchising profit

The correct answer is B.Review section "B. TYPES OF COST" for details.The cost of ENTREPRENEURIAL PROFIT, which is the amount that the owner/developer would expect to make from improving the property. Entrepreneurial profit is not the same thing as the actual profit or loss on a project. It is an amount (usually a percentage) that an investor would expect to earn when deciding to undertake development of a similar project.

When a basic cost calculation is adjusted to reflect extra features or refinements, which cost method is used? A. The comparative square foot method B. The unit-in-place method C. The index method D. None of the choices

The correct answer is B.Review section "B. UNIT IN PLACE METHOD" for details.The UNIT-IN-PLACE METHOD requires the appraiser to measure the quantities of various building components, such as foundation, floor, walls, roof, doors, windows, etc. The quantity of each item is then multiplied by its appropriate unit cost, and the subtotals for the building components are added together to get the total cost (see Figure 8-4).

What method requires the appraiser to measure the quantities of various components, such as foundation, floor, walls, roof, etc.? A. Cost per unit method B. Unit in place method C. Market analysis method D. cost index trending method

The correct answer is B.Review section "B. UNIT-IN-PLACE METHOD" for details.The UNIT-IN-PLACE METHOD requires the appraiser to measure the quantities of various building components, such as foundation, floor, walls, roof, doors, windows, etc.

Estimating costs by detailed breakdown of labor, materials and indirect costs is using which of the following? A. Index method B. Quantity survey method C. Comparative square foot method D. Unit-in-place method

The correct answer is B.Review section "C. QUANTITY SURVEY METHOD" for details.In the quantity survey, the costs for labor, materials, equipment and overhead are each calculated separately. Also, the level of detail in a quantity survey estimate is greater than in a unit-in-place estimate.

Which method takes into account the amount of depreciation due to curable items which is considered equal to the cost of curing the defects? A. Observed condition method B. Cost to cure method C. Capitalization method D. Sales comparison method

The correct answer is B.Review section "D. COST TO CURE METHOD" for details.The COST TO CURE METHOD takes into account the amount of depreciation due to curable items (curable physical deterioration or curable functional obsolescence) which is considered to be equal to the cost of curing the defects

The difference between the cost of improvements (new) and their current value is called: A. appreciation B. depreciation C. investment return D. equity

The correct answer is B.Review section "I. BASICS OF THE COST APPROACH" for details.For purposes of appraisal, the term DEPRECIATION refers to a loss in the value of an improvement (as compared to its cost) due to any reason. Depreciation is the difference between the market value of the improvement and its cost.

Estimates of depreciation are generally more reliable in the case of: A. older homes B. newer homes C. larger homes D. smaller homes

The correct answer is B.Review section "II. APPLICATION OF THE COST APPROACH" for details.The cost approach is usually most appropriate for newer structures. The older the structure, the less reliable is the approach, since the determination of accrued depreciation is becomes more and more subjective the older the building is.

If construction costs are 10% higher in the local market than the average costs listed in a costing manual, the appraiser should adjust the unit costs used in the cost estimate by: A. multiplying them by 10% B. multiplying them by 110% C. multiplying them by 90% D. dividing them by 90%

The correct answer is B.When the construction costs are 10% higher the unit costs should be increased by 10% as well.

Which of the following is the most commonly used method by appraisers to estimate cost of residential properties? A. Cost index trending B. Quantity survey method C. Comparative unit method D. contractor survey method

The correct answer is C.Review section "A. COMPARATIVE UNIT METHOD " for details.In the COMPARATIVE UNIT METHOD cost is estimated on the basis of the square footage of building area, or the cubic footage of building volume. Residential cost estimates using this technique almost always use square footage, so it is often referred to as the square foot method.

A poor floor plan design is an example of: A. deferred maintenance B. a superadequacy C. functional obsolescence D. economic obsolescence

The correct answer is C.Review section "B. FUNCTIONAL OBSOLESCENCE " for details.Functional obsolescence is "built-in" obsolescence.When an improvement suffers from depreciation that is caused by design defects, this form of depreciation is called FUNCTIONAL OBSOLESCENCE.

Depreciation caused by design defects is called: A. a superinadequacy B. dysfunctional obsolescence C. functional obsolescence D. all of the above

The correct answer is C.Review section "B. FUNCTIONAL OBSOLESCENCE" for details.In addition to physical wear and tear, an improvement can suffer from depreciation that is caused by design defects. This form of depreciation is called FUNCTIONAL OBSOLESCENCE.

Which of these is considered an indirect cost? A. Labor costs B. Material and equipment costs C. Interest on construction financing D. Subcontractors' fees

The correct answer is C.Review section "B. TYPES OF COST" for details.Types of costs include direct costs, such as the costs for labor, materials and equipment used in the construction, as well as soft costs, and also indirect costs, such as architects� fees, construction loan interest, property taxes during the development period and real estate sales commissions.

Of the four methods of estimating cost, which is the most often used by appraisers? A. Index method B. Unit-in-place method C. Comparative square foot method D. Quantity survey method

The correct answer is C.Review section "C. QUANITY SURVEY METHOD" for details.In the Comparative Unit Method, construction cost is estimated on the basis of the square footage of building area, or the cubic footage of building volume. Residential cost estimates using this technique almost always use square footage, so it is often referred to as the square foot method. It is the cost estimating method most often used by appraisers.

Which of the following cost estimating techniques would include an estimate of the labor rates and man hours necessary to install the plumbing system in a house? A. Unit-in-place method B. Cost index trending method C. Quantity survey method D. Comparative unit method

The correct answer is C.Review section "C. QUANTITY SURVEY METHOD " for details.The QUANTITY SURVEY METHOD is the most detailed and most reliable method for estimating construction costs.In the quantity survey, the costs for labor, materials, equipment and overhead are each calculated separately.

Estimating the reproduction cost of a building whose original construction cost is known is called: A. unit in placement method B. quantity survey method C. cost index trending method D. contractor survey method

The correct answer is C.Review section "D. COST INDEX TRENDING" for details.COST INDEX TRENDING is a method of estimating the reproduction cost of a building whose original construction cost is known.

A building's square footage is determined by: A. a licensed contractor only B. multiplying length times width C. first measuring the outside dimensions to break it down into rectangles and triangles D. both b and c

The correct answer is D.Review section "A. COMPARATIVE UNIT METHOD " for details.SQUARE FOOTAGE is determined by multiplying length times width (first measuring the outside dimensions of the building to break it down into rectangles and triangles).

The actual age of a building is also referred to as the: A. optimal age B. effective age C. expected age D. chronological age

The correct answer is D.Review section "B. AGE AND ECONOMIC LIFE " for details.Depreciation is related to the age of an improvement. Improvements have an actual age and an effective age. ACTUAL AGE (also called chronological or historical age) is the actual amount of time that the improvement has been in existence.

The effective age of an improvement: A. depends on the actual age of the improvement B. is the difference between actual age and economic life C. is the difference between actual age and remaining economic life D. is the difference between economic life and remaining economic life

The correct answer is D.Review section "B. AGE AND ECONOMIC LIFE " for details.EFFECTIVE AGE is the apparent or functional age of the improvement, based on its current conditions and the current conditions in the mark

Superadequacy refers to a type of: A. external obsolescence B. economic obsolescence C. physical deterioration D. functional obsolescence

The correct answer is D.Review section "B. FUNCTIONALE OSSOLESCENCE " for details.SUPERADEQUACIES are forms of over improvement; design features whose costs are greater than their contribution to value.

The unit costs used with the unit-in-place method include the costs of: A. labor B. materials C. equipment D. all of the above

The correct answer is D.Review section "B. UNIT-IN-PLACE METHOD" for details.The UNIT-IN-PLACE METHOD requires the appraiser to measure the quantities of various building components, such as foundation, floor, walls, roof, doors, windows, etc.The unit-in-place method gets its name from the fact that the unit costs for each construction item represent the total cost to install or build the item, including the cost of materials, labor, equipment and overhead.

External obsolescence is a loss in value: A. also known as economic obsolescence B. resulting from causes outside the property itself C. that is considered incurable D. all of the above

The correct answer is D.Review section "C. EXERNAL (ECONOMIC) OSBOLESCENCE" for details.EXTERNAL (ECONOMIC) OBSOLESCENCE, which is a loss in value resulting from causes arising outside of the property itself. The most common causes of external obsolescence are negative influences from nearby sources and poor or deteriorating economic conditions.

A chemical plant opened near a small residential neighborhood. As a result, property values in the neighborhood have decreased dramatically. This is an example of: A. physical deterioration B. physical obsolescence C. functional obsolescence D. external obsolescence

The correct answer is D.Review section "C. EXTERNAL (ECONOMIC) OBSOLESCENT " for details.An EXTERNAL (ECONOMIC) OBSOLESCENCE is one which is a loss in value resulting from causes arising outside of the property itself. The most common causes of external obsolescence are negative influences from nearby sources and poor or deteriorating local economic conditions.

Depreciation may be measured by: A. market comparison B. income capitalization C. cost to cure D. any of the above

The correct answer is D.Review section "VII. METHODS OF ESTIMATING DEPRECIATION" for details.The methods of estimating depreciation are:A. Economic Age-Life MethodB. Sales Comparison MethodC. Capitalization MethodD. Cost to Cure MethodE. Observed Condition Method