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Chapter 12 Value Theory, Highest and Best use Analysis, and the Cost Approach Major Topics • Value, Price and Cost Concepts • Market Price Formation from Reservation Prices • Traditional Methods of Valuation • Newer Approaches to Value • Highest and Best Use Defined • Improved or unimproved (vacant) • The Impact of Option Value • When Cost approximates market value • Methods to estimate cost new • Methods to estimate accrued depreciation • Replacement versus reproduction cost Terms • Subject Property • Appraisal = “opinion of value” • Cost • Reservation Price/Investment Value • Liquidation value • Market Value • Most probable selling price, assuming “normal” sale conditions. • Value for the “typical” market participant. Price and Value Formation Methods of Valuation • Cost Approach • Market or Sales Comparison • Income Approach Highest and Best Use Definition of Highest and Best Use (H&B Use) “The reasonably probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value” as of the date of the appraisal Option Value Site Value = Current Use value + Future Use Value/ Option Value Improved Site Value • Usually, H&B use of an improved property is the current use • Cost of construction and demolition > cost of construction alone and also the opportunity cost of time for the conversion Lost income during construction Demolition Cost and New market Site Prep value with a new building at H&B use Existing Building Value The Steps in the Cost Approach Step 1: Estimate land value Step 2: Estimate the structure cost new Comparative-Unit Method Unit-in-place Method Quantity Survey Method Costs Step 3: Deduct accrued Depreciation Depreciation Depreciation 1. Physical 2. Functional 3. Location or External Curable Defects Negative Value of Incurable Depreciation Accrued Depr Cost New * Effective Age ÷ Economic Life Cost Approach 2 acre lot, 3-year-old house, 60-year life 2000 square feet finished living areas 500 SF unfinished garage Estimates: $50/SF for finished $28/SF for unfinished Lot = $25,000 Cost Approach 1. Lot = $25,000 2. Finished = 2000SF * $50/SF = $100,000 Garage = 500SF * $28/SF = $14,000 Reproduction Cost = $114,000 3. Depreciation = 3/60*$114,000 = $5700 Estimate = $25K + 114K - 5700 = $133,300
"Chapter 12 Value Theory_ Highest and Best use Analysis_ and the "