Once the appraiser finds comparable sites that are very similar to the subject property with respect to physical, locational, and neighborhood features, he or she makes adjustments to compensate for any differences.  Then the appraiser examines the other aspects of comparability—the market conditions at the time of sale for the comparable properties, the financing used in the purchase, and the property rights transferred in each sale.

Replacement cost is the current cost to construct a new improvement that serves the same purpose as the subject property and that is as useful as the subject property in meeting the needs of the owner.  However, the construction of the new building uses currently available building materials, manual skill, technology, design and floor layout.  Replacement cost is the dollar amount paid for labor, and materials at current prices.

If the subject property is relatively new, reproduction cost is appropriate to use in estimating the construction cost of that property.  The quality of building materials, the type of material used, the manual skill involved in the construction process, and the techniques used in construction do not change drastically in short periods of time.  Appraisers believe the accuracy of the reproduction cost method is very acceptable for structures that are new to ten or even fifteen years old.  The accuracy may be acceptable even for structures as old as twenty to twenty-five years old.

If the subject property is older than twenty-five years or so, the appraiser would use replacement cost to estimate the cost of constructing a similar building that meets the needs of the owner.  In this situation the appraiser uses current materials and techniques to estimate the construction cost of a new replacement building for the subject property that would provide the same use and benefits to the owner.

In practice, reproduction cost is the most commonly used cost approach for estimating value.  Replacement cost is less useful because it is difficult to identify and measure what is “equal utility,” and because construction materials and standards of manual skill change over time.  In summary, the cost approach relies on estimating the reproduction cost for a new building using current standards of materials, manual skills, and construction technology.

In addition to the direct costs of construction, the appraiser must estimate a dollar value for the indirect costs of construction such as fees for the professional services of architects, engineers, surveyors, and lawyers; overhead expenditures of the developer including the cost of building permits and licenses; insurance premiums and property tax outlays during the construction the interest payments on the construction loan; selling expenses of the developer, and the developer’s profit.  When the appraiser adds these indirect costs of construction to the direct costs of construction on a per unit basis, the appraiser has a detailed estimate of the reproduction cost of a structure that is a replica of the subject property.

Because of the enormous degree of specificity required, appraisers rarely use the quantity survey technique in actual practice.  However, an understanding of its structure does set the basis for an understanding of what the appraiser is attempting to accomplish in the cost estimating process.

The appraiser can draw upon various data sources that provide construction costs per square foot for various sizes and types of structures.  In addition, data services provide figures on changes in the prices of building material and in the wage rates of construction labor.  By using these data sources and local information, the appraiser can quickly estimate the reproduction cost of a structure in the local market.  Conceptually, the comparative technique is the least accurate of the three cost estimating techniques because it is less specific and comprehensive than the quantity survey or the unit in place method. However, in practice, the comparative technique may be the most accurate because the typical appraiser’s expertise is not in construction techniques that underlie the quantity survey and unit-in-place methods.

Physical deterioration is either curable or incurable, depending on the costs of repairing or replacing the deteriorating items in the structure.  If the repair cost is less than or equal to the increase in the structure’s value after the repairs, the physical deterioration is curable.  However, if repair cost exceeds the increase in value consequent upon that repair, the physical deterioration is incurable.  The dollar estimate of curable physical deterioration is simply the cost to repair or replace the deteriorated component of the structure.  The dollar estimate for incurable physical deterioration is a judgment made by the appraiser concerning the amount by which the typical buyer would reduce his or her offer for the property because of the existence of the physical deterioration.  Regardless of whether physical deterioration is curable or incurable, the appraiser must take note of it and estimate its value-reducing impact on the market value of the structure.

Functional obsolescence may also be curable or incurable.  As with physical deterioration, the distinction between curable and incurable depends upon the relation between the cost to replace or change and the value that the replacement or change may add to the market value of the structure.  If the replacement or change of a feature in the structure adds more to the market value than the cost of the change, the functionally obsolescent feature is curable.  If the cost to replace, remove, or add exceeds the addition to the market value, the functionally obsolescent feature is incurable.  Items often classified as curable functional obsolescence include an insufficient number of electrical outlets, insufficient closet or cabinet space, and inadequate water heating capacity.  Items of incurable functional obsolescence usually pertain to a structure’s basic design and systems.  Ceilings that are too high; inefficient traffic patterns; inadequate heating, electrical, plumbing, and air-conditioning systems; and an insufficient number of bathrooms are examples of functional incurable obsolescence.

To establish a dollar value for functional obsolescence, the appraiser must first ascertain the cost to replace, the cost to remove or add, or the cost to change the obsolete feature.  Once the appraiser has this information, the appraiser can make an estimate of functional obsolescence.  The dollar estimate of curable functional obsolescence is the difference between (1) what it would cost to add a missing feature or to remove or change a feature on the date of the appraisal and (2) the cost of incorporating or omitting this feature as part of the construction cost of the total structure on the same date.  The underlying premise is that additions or removals after the initial construction are more expensive than inclusion or exclusion during the original construction phase.

The dollar estimate of incurable functional obsolescence is the difference between what the missing or obsolete feature could add to the value of the improvement and what it would have cost to include that feature in the original construction.  The appraiser often develops this estimate from comparable rental or sales data.  For example, the appraiser knows from experience or can determine from market data that four-bedroom houses of a certain size, style, and quality located in a certain neighborhood typically sell for $2,500.00 more than three-bedroom houses of the same style and in the same neighborhood.  The appraiser also can determine that the reproduction cost of that fourth bedroom is $3,500.00; in other words, there is a $3,500.00 difference in the construction costs of the four-bedroom and the three-bedroom houses.  Given these two facts, the appraiser knows that the dollar value of incurable functional obsolescence in this case is $1,000.00, the difference between the $3,500.00 reproduction cost and the $2,500.00 market premium for a fourth bedroom.

The impact of external obsolescence upon  the land will usually be reflected in the valuation of the site through analysis of the comparables and the value inferred from them.  While land is usually thought not to suffer from obsolescence as such, some value diminution can result that hasn’t been revealed by the analysis of the comparable properties.  Thenthe appraiser may assign some loss in value  to the land.  For example, assume that the factor causing external obsolescence is deterioration in the quality of adjacent properties.  If comparable properties in the neighborhood are selling for $35,000.00, whereas comparable properties in a neighborhood that does not contain deteriorating structures are selling for $42,000.00, the dollar estimate of external obsolescence is $7,000.00.  The appraiser must make a judgment about what percent of the value loss to allocate to the land and then subtract the remaining percentage of the total value loss from external obsolescence from the reproduction cost of the new improvement to represent incurable external obsolescence.

The appraiser can establish the value reduction by examining the difference between rents of properties in a good neighborhood and those in a poor neighborhood.  The difference in rent revenues between comparable properties serves as an indication of the value-depressing factors operating in the poor neighborhood.  To calculate the value reduction, the appraiser determines the difference in rent revenues between the comparable properties and multiplies that difference by a gross monthly rent multiplier (GMRM) for the neighborhood of the subject property.

The estimate for accrued depreciation is the ratio of effective age to the sum of effective age plus remaining economic life.  If effective age is five years and remaining economic life is 40 years, the ratio is 5/(5+40) equal to approximately 11 percent depreciation.  If on the other hand, effective age is 25 years and remaining economic life is 10 years, the ratio is 25/(25+10) equal to approximately 71 percent depreciation.  The appraiser multiples the age-life ratio times the value of the reproduction cost of the new improvement to get the estimate for dollar value of accrued depreciation.