Florida Real Estate Sales Associate Examination Content OutlineReal Estate Valuation and Market AnalysisMedium
An appraiser is evaluating a commercial property using the cost-depreciation approach. The cost to construct a new building with the same utility is estimated at $1,500,000. The land value is $300,000. The appraiser determines that the building has accumulated depreciation of $250,000 due to physical deterioration, functional obsolescence, and external obsolescence. What is the indicated value of the property using this approach?
- A$1,250,000
- B$1,750,000
- C$1,550,000
- D$1,050,000
Show answer & explanationAnswer & explanation
Correct answer: C. $1,550,000
The cost-depreciation approach calculates the value by estimating the cost to build a new reproduction or replacement, subtracting depreciation, and adding the land value. Here, $1,500,000 (new construction cost) - $250,000 (depreciation) + $300,000 (land value) = $1,550,000.
Why the other options are wrong
- A. Incorrect. This only reflects the depreciated value of the building, without adding the land value ($1,500,000 - $250,000 = $1,250,000).
- B. Incorrect. This would be the cost to build new plus land, with no depreciation considered ($1,500,000 + $300,000 = $1,800,000), or an incorrect subtraction.
- D. Incorrect. This would be subtracting the land value instead of adding it, or an incorrect calculation of depreciation.
Cost-Depreciation Approach Formula
The cost-depreciation approach to appraisal calculates property value by estimating the cost to replace or reproduce the improvements, subtracting all forms of depreciation, and then adding the estimated land value.
- Often used for new construction or properties with unique improvements where comparables are scarce.
- Value = (Replacement/Reproduction Cost - Accumulated Depreciation) + Land Value.
- Depreciation includes physical deterioration, functional obsolescence, and external obsolescence.
Memory trick: Build, Subtract the Wear, Add the Earth.