IAAO Course 101 Chapter 3 Questions and Answers

Cost Approach Formula - Answer- Market Value=Land Value + Improvement Value The Cost Approach is supported by what Principle? - Answer- Substitution-Informed buyers will not pay more to build a house if than the cost to acquire an equally desired one. The shape of building may affect building cost, so you must get the area-perimeter ratio, which is - Answer- Square foot /linear foot (perimeter) to get ratio. *The lower the ratio, the more expensive to build. Direct Cost - Answer- "Hard Cost" Labor, Materials, supervision, rentals, and utilities Indirect Cost - Answer- "Soft Cost" Fees, insurance, overhead, and profit. Concepts of Estimating Cost (4) - Answer- Reproduction Cost New Replacement Cost New Historical Original Cost Trended Historical Cost Reproduction Cost New - Answer- "Exact Replica" Using same materials Replacement Cost New - Answer- Replacing a building with a new building, modernizing a home. Historical Cost - Answer- "Original Cost" Price when it was built. Trended Historical Cost - Answer- The cost to build a build from the past. It begins as a historical cost and the price is factored by using a year index measurement trend table. 4 Methods of Estimating Cost - Answer- Quantity Survey Method Unit In Place Method Square Foot or Comparative Unit Method Factored Historical Cost Quantity Survey Method - Answer- QSM-Most accurate. Very Detailed. Unit in Place Method - Answer- Combine direct and indirect cost, then you add entrepreneurial profit and then it gives you the total to build the building. Horizonal Cost - Answer- Foundation, floor, roof, and electrical (Expressed as costs per square foot) Vertical Cost - Answer- Exterior Walls and Interior partitions (Expressed as costs per linear foot) Lump-Sum Cost - Answer- Unit Heaters, elevators, or water heaters (Constant cost components) Change Square Foot or Comparative Unit Method - Answer- Easiest and most widely used. Direct and Indirect cost and wanted profit are added and divided by sq. ft. to get *cost per unit. Trended Original Cost or Factored Historical Cost Method - Answer- Bring the price up to date by the year index econ report. How is the Trend Factor Determined - Answer- Current Year divided by Historic Year = Trend Factor ( It will be on a table) Should be a decimal like 1.2. Reproduction Cost for the improvement is found how? - Answer- Find Trend Factor Decimal, Multiply Square Feet x Factor Decimal, then multiply that number by the house sq. ft. in the question, that add any new additions if any. 180/120= 1.5 60x1.5= 90 dollars per sq. feet $90 x 1800 (house in the question)= + Garage and Patio added 20,000= Cost Manuals - Answer- Marshall and Swift, but you can create your own, you just need to make sure they are closely related. Depreciation - Answer- The difference between the cost new of an improvement and its market value as of the date of appraisal. 3 Types of Deterioration - Answer- Physical Deterioration Functional Obsolescence External Obsolescence Economic Age Life Method - Answer- Uses straight line method depreciation. Effective Age - Answer- age based on the mount of observed deterioration negatives (obsolescence) Remaining Economic Life - Answer- The estimated number of years remaining to which it still contributes value. Example: Age that people are still physically able to play sports or be active. Economic Life or TEL Total Economic Life - Answer- the number of years during which the improvements contribute to value. Example: People are usually physical up to a certain age to be active and athletic. Economic Age Life Depreciation Formula - Answer- EA + REL = TEL Example: The good age to play pro football is between 20-35, Cody is 30, so his REL is 5 years. 15 years =TEL So his effective age is 15-5=10 He has been deteriorating his athletic body for 10 years. What % depreciation of a 35 year old house that has a total economic life of 60 years and remaining economic life of 36 years? - Answer- Subtract remaining economic life from TEL = 24 24/60 = .4 or 40% depreciation Observed Condition Method or Breakdown - Answer- Most complete and accurate way to handle depreciation. Uses the GIM and GRM Formula for GIM and GRM - Answer- Sales Price/ Gross Annual or Monthly Income Curable Physical Deterioration - Answer- Needs and can be fixed. Measured by Cost to Cure. Examples: Broken door or window Cost to Cure - Answer- Complete cost to fix it in current time in including everything. Incurable Physical Deterioration (Short Lived) - Answer- The items that are not ready to be replaced. Have more life left in them. How is Incurable Physical Deterioration Measured (Short Lived) - Answer- Age-Life Ratio: Actual Age/ Total Useful Age Examples: Roof, Appliances, water heater. Incurable Physical Deterioration (Long Lived) - Answer- The Basic Structure or the "bones" of the place. The wearing out is not easily seen, for example the framing, foundation walls, piping. How is Incurable Physical Deterioration Measured (Long Lived) - Answer- Estimate age of age-life ratio (Actual age 15 years/TEL 60 years) and multiply that by RCN (minus all short lived items) Functional Obsolescence - Answer- Loss in value due to do something about it being functionally inadequate. 3 Forms of Functional Obsolescence - Answer- Normal Deficiency-not having something everyone wants (2 bathrooms) Modernization Deficiency-wanting to be like everyone else (updated kitchen) Superadequacy-Exceeds the expectations in a bad way. (5 bathroom) What is "excess cost to cure" and is used because there is an additional installation of a new item? Ex: Lack of second bathroom or central air - Answer- Curable Functional Obsolescence Deficiency-Normal Modernization is measured by - Answer- RCN - any depreciation + total cost to cure (intallation and removal) less coss if installed new What is Curable Functional Obsolescence- Superadequacy measure by? - Answer- Cost of existing item - depreciation + cost to cure (remove) - cost of installation *New duplex converted to office space (furnace) 3-26 Incurable Functional Obsolescence-Normal Deficiency - Answer- The subject has a decrease in utility due to the lack of some item or feature that is not feasible to cure. How do you measure Incurable Functional Obsolescence-Normal Deficiency? - Answer- Multiply the net income (rent) loss because of deficiency TO GRM. See how much loss you are obtaining over time. *10 unit apt. $15 per apartment x 12 months=1800 1800 x 6 (GRM in Exercise 3-16)= 10,800--> IFO-ND Incurable Functional Obsolescence-Superadequacy - Answer- Occurs when a property component exceeds market requirements. Adds no value. The diminished utility of an improvement due to negative influences emanating from outside the building and usually classified as __________. - Answer- Incurable External Obsolescence is measured by: - Answer- Come up with rent loss Then multiply that number by GRM Find Land:Building Ratio 1:4 Multiply the (GRM x Rent loss Amount) by building portion .8 Then that's your answer Ex. 3-28