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?

  1. A$550,000
  2. B$520,000
  3. C$470,000
  4. D$400,000
Show answer & 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.

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