Module 42.4 LOS 42.i: Valuing Real Estate Using the Cost and Sales Comparison Approach

Cost Comparison Approach

Estimate the market value of the land. The value of the land is estimated separately, often using the sales comparison approach.

Estimate the building’s replacement cost. Replacement cost is based on current construction costs and standards and should include any builder/developer’s profit.

Deduct depreciation including physical deterioration, functional obsolescence, locational obsolescence, and economic obsolescence. Physical deterioration is related to the building’s age and occurs as a result of normal wear and tear over time. Physical deterioration can be curable or incurable. An item is curable if the benefit of fixing the problem is at least as much as the cost to cure. For example, replacing the roof will likely increase the value of the building by at least as much as the cost of the roof. The cost of fixing curable items is subtracted from replacement cost.

Sales Comparison Approach

The premise of the sales comparison approach is that a buyer would pay no more for a property than others are paying for similar properties in the current market. Ideally, the comparable properties would be identical to the subject but, of course, this is impossible since all properties are different. Consequently, the sales prices of similar (comparable) properties are adjusted for differences with the subject property. The differences may relate to size, age, location, property condition, and market conditions at the time of sale. The values of comparable transactions are adjusted upward (downward) for undesirable (desirable) differences with the subject property. We do this to value the comparable as if it was similar to the subject property.

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