An approach used in the appraisal of
real property based on the concept of
objective value. Objective value affirms
that the cost to create is the main
criterion in estimating value and guided by
the principle of substitution, which
maintains that a prudent buyer will pay no
more for a property than the cost of
producing or creating an equally desirable
property, providing no delay occurs in
making the substitution. In other words, at
any point in time, building values cannot
rise above their reproduction cost.
Basic steps in applying the
cost approach are itemized in
five stages.
Estimate the value of the site.
Estimate the reproduction cost as if
new on the effective date of the
appraisal. Replacement cost may be used
depending on the circumstances.
Estimate the accrued depreciation
suffered by the improvements from all
causes.
Subtract the accrued depreciation
from the reproduction cost new (or
replacement cost, if applicable), of the
improvements.
Add the value of the site to arrive
at an estimate of the market value of
the property.
The cost approach is particularly
applicable when the property involves
relatively new improvements that represent
the highest and best use of the land, or
when the site possesses unique or
specialized improvements, for which there
are no comparable properties on the market.
A process (in the construction
industry), involving an estimate based on a
quantity survey that includes the cost of
all materials, labor, and other essentials.
In appraising, it is a process of estimating
the reproduction or replacement cost of an
improvement by one of several methods,
including: comparative square meter method,
cost services method, quantity survey
method, and unit-in-place method.
Cost estimates from a real estate
perspective typically involve hard (direct)
costs and soft (indirect) costs. For
example, in a residential development, the
estimate would include curbs, sidewalks,
paved roads, street lighting, and
water/sewer services (hard costs), and
professional fees such as surveying,
engineering, and legal (soft costs).
A method of estimating reproduction cost
under the cost approach in an appraisal, in
which dollar costs are provided by cost
service manuals. Following, is an
abbreviated list of companies that provide
costing manuals.
Marshall & Swift
Valuation Service
Marshall & Swift Publication
Company
Los Angeles, California
Boeckh Valuation and
Cost Systems
General Appraisal Corporation
Toronto, Ontario
Yardsticks for
Costing
Southam Business Publications
Ltd.
Toronto, Ontario
Dodge Building Cost
Calculator & Cost Guide
McGraw-Hill Information Systems
Company
New York, New York
The Walke Building
Estimator’s Reference Book
Frank R. Walke company
Chicago, Illinois
Lansdowne’s
Construct Cost Handbook
David K. Lansdowne and Partners
Limited
London, Ontario
Costing manuals provide basic unit costs
for a range of building structures of
differing qualities. Also included are costs
of physical considerations, e.g., fireplace,
finished basement, and cost differences
based on the size and the shape of building.
This information is provided in the form of
photographs, charts, and tables with
supplements provided on a periodic basis.
These supplements furnish the necessary time
and geographic location adjustments, by way
of multipliers, which are then applied to
the basic costing manual.
The appraiser’s job is to select a
structure within the chosen manual that is
most similar to the subject property.
Differences between the subject and the
manual’s benchmark structure must be
adjusted based on amounts obtained from the
manual. The costing of a building by the
cost services method may appear to be
replacement cost rather than reproduction
cost because some of the subject property’s
obsolete features can be replaced in the
costing approach by their modern
counterparts. For example, the current base
cost per square foot shown in the manual for
a standard building will likely include
factory-made kitchen cupboards, as opposed
to carpenter-made cupboards in the subject
building. Any loss in value resulting from a
lack of modernization in the subject
building will be considered by the appraiser
and accounted for as an item of curable
functional obsolescence in the depreciation
schedule.
The cost services
method can be an effective method of
estimating building costs provided that the
appraiser selects the most comparable
building and appropriate adjustments are
made. No two buildings are identical
therefore, adjustments are likely required
and the accuracy of the cost services method
depends on the appraiser’s choices.
Looking to Buy or Sell Luxury
Real Estate In Toronto, North York, Thornhill,
Woodbridge, Vaughan, Richmond Hill, Aurora, King
City and beyond...visit LuxuryBroker.ca
Mortgages247.ca 2011 Apply Online without Blackouts Mortgages247.ca is designed to provide competent and
reliable information regarding the subject matter covered. However it is
provided, free of charge, with the understanding that the authors are not
engaged in rendering legal, financial or other professional advice. Law and
practice often vary from province and province and if legal or other expert
assistance is required, the services of a professional should be sought. The
authors specifically disclaim any liability that is incurred from the use or
application of the contents of this website.
