California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
An appraiser is valuing a property where the land is valued at $150,000. The cost to construct the improvements today would be $400,000. The improvements have an estimated economic life of 50 years and are 10 years old. If the appraiser uses the cost approach, what is the estimated value of the property?
- A$550,000
- B$520,000
- C$470,000
- D$400,000
Show answer & explanationAnswer & explanation
Correct answer: C. $470,000
First, calculate the accrued depreciation: ($400,000 / 50 years) * 10 years = $8,000/year * 10 years = $80,000. Then, calculate the depreciated value of improvements: $400,000 - $80,000 = $320,000. Finally, add the land value: $320,000 + $150,000 = $470,000.
Why the other options are wrong
- A. This is the cost new of improvements plus land value, without accounting for depreciation.
- B. This is an incorrect calculation, possibly using a higher depreciation amount or other error.
- D. This represents only the cost to construct improvements, ignoring land and depreciation.
Cost Approach to Value
A valuation method that estimates the value of a property by summing the estimated value of the land and the depreciated cost of any improvements.
- Value = Land Value + (Replacement Cost New - Accrued Depreciation)
- Most reliable for new construction and special-purpose properties
- Difficult to apply to older properties due to depreciation estimation
Memory trick: Land plus new build minus the wear, equals the value that is fair.