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- REPLACEMENT COST PRICING:
- for when MARKET DATA APPROACH CANNOT be used
- like NOT enough COMPS around
- like in RURAL areas or UNIQUE properties
- base on CURRENT COST to REPLACE or REPRODUCE
- REPRODUCTION COST: to PRECISELY DUPLICATE
- used rarely, expensive, different building techniques now
- REPLACEMENT COST: same function but NOT EXACT REPLICA
- most useful of the two and used most often
- based on following formula:
VALUE OF LAND
plus REPLACEMENT COST
less DEPRECIATION (improvements only)
--------------------------------
equals ESTIMATED PRICE
- STEP 1: Estimate the price of the land as if it were vacant
- Two Methods:
- MARKET DATA if COMP vacant lots are around
- ASK LOCAL BUILDERS what they WOULD pay
- STEP 2: Estimate the replacement cost of the improvements
- Three Methods:
- the SQUARE FOOT method - least accurate but easiest so most useful
- the UNIT IN PLACE method - more difficult, more accurate
- the QUANTITY SURVEY method - most difficult & accurate, least used
- WE'LL only use SQUARE FOOT METHOD [substeps will be letters]
- A: DETERMINE "COST FACTORS" (major element square footage costs)
- MOST IMPORTANT for final VALUE ESTIMATE
- consult builder for estimates or ask your broker
- NOTE: FIRST FLOOR MOST EXPENSIVE because it includes
roof and foundation
- B: DETERMINE SQUARE FOOTAGE of each MAJOR ELEMENT
- use OUTSIDE dimensions
- C: MULTIPLY each MAJOR ELEMENT'S SQUARE FOOTAGE times its
COST FACTOR, then SUM the PRODUCTS
[ - remember the floor plans in the lessons - simple drafting - ]
- STEP 3: Add price of land and the cost to replace the building
- STEP 4: Make deductions for depreciation - building only, not land
- for PHYSICAL DETERIORATION:
- use "COST TO REPAIR"
- get estimates for stuff like NEW PAINT, CARPET, etc
- TOTAL of said is TOTAL ESTIMATED DEPRECIATION
- for FUNCTIONAL OBSOLESCENCE and ECONOMIC OBSOLESCENCE
- beyond the scope of this cource - consult your broker
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