Web Sites

Web Sites• https://iowalandrecords.org/portal/

• http://cairo.gis.iastate.edu/search.html

• http://www.farmersnational.com/

• http://www.hfmgt.com/

• http://www.iowalandsalesreport.com/

Cost approach (cont)• Value of the land determined first• Cost for the building;– Reproduction; cost to construct an exact replica

of the existing building– Replacement; cost to construct a building with the

utility equivalent to the one being appraised; using modern material, current standards, design, layout, etc.

• Using either method use the date of the appraisal and with current prices

Data sources• Local builders• Market abstraction; based on sale of a new

building after the land is subtracted; works best with houses, not so good with rural property

• Cost services; this is a group that summarizes costs for the appraiser; they provide manuals and other information to use in making the appraisal

Cost approaches• Estimating the costs for construction of buildings

can be very time consuming and tedious• Depreciation difference between the cost to

reproduce or replace property and its contributory value as of the date of the appraisal

• Physical deterioration; • Functional obsolescence Defects in design;

material, design, otherwise obsolete by current standards Sometimes this could be cured

• External obsolescence; effect on value from outside property itself; traffic, odor, hazards, etc

Depreciation examples• Corn used to be harvested on the ear and stored in ‘cribs’.

Today most of the cribs have been abandoned. This is an example of – Functional depreciation

• A modern hog confinement needs greater ventilation of the waste pits. This is an example of:– Functional depreciation

• Asphalt singles on the garage are starting to leak. This is an example of:– Physical depreciation

• A ethanol plant is located across the road. The resulting dust, traffic, etc. would cause:– External obsolescence

• What is an economic term for this?

Physical depreciation• Curable; this is when the deterioration is

economically feasible to cure and they generally are taken care of; deferred maintenance; be sure to include all costs!

• Physical incurable; this is when the deterioration either can’t be corrected or it would cost more to correct than its contributory value to the property– Short lived; roof, furnace, etc. that would be replaced

some time but not at the time of the appraisal– Long lived; basically the ones that will last the life of

the improvement; foundation, etc.

Estimating depreciation• Economic age-life method:– Depreciation = Effective age/economic life * replacement

cost• Actual age is when it was built but there could have

been extensive remodeling that would change the effective age; the effective age is based on condition and utility of the structure; there are judgments that has to be made

• Economic life is the time where the improvements contribute to the property value; they can be extended

• Remaining economic life is time left where the improvements continue to contribute to the property value

Estimating depreciation

• Econ. life = effective age + remaining econ. life• Effective age = Econ. Life - remaining econ. life• Remaining econ. life = Econ. life - effective age

• A major problem with this approach is that it groups the types of depreciation together.

Example

Modified Econ. Age/life method• The appraiser can recognize the curable items

of physical deterioration and functional obsolescence by estimating the cost to ‘cure’ them.

• This amount is then subtracted from the replacement costs.

• The appraiser has to recognize the impact this adjustment might have on the effective age and economic life

Example of modified econ. life

Estimating Depreciation• Market abstraction– First step is to estimate the depreciation from a sale– Second step is to apply this estimate to the subject

building• This works for properties either with similar

problems as the subject with respect to curable and incurable or for properties without physical curable or incurable short live items

• The appraiser is trying to estimate the annual percentage depreciation from the sale and apply it to the subject

Annual Percent depreciation example

Application to the subject

Considering curable items

• The market abstraction approach can also be modified to consider the curable depreciable items

• Similar process

Reconciling the estimates• Remember that the whole purpose of this is

to come up with an estimated value for the property.

• We want to correlate the values indicated from the different approaches we used and to come up with a single value.

• “Reconciliation is the method of bringing together all of the data and analyses into one final estimate of value.”

Reconciling the estimates

• The reliability of the data is crucial, garbage in, garbage out

• A wide spread in the estimates from the different approaches indicates a strong possibility there were mathematical and/or technical errors made.

• In theory, all of the approaches should lead to the same estimate. But, for this you need;– The markets to function perfectly– The appraiser to function perfectly

Reconciling the estimates

• That’s not likely to happen– The market is the market and sometimes things

don’t happen the way you’d expect. I think this is especially true with land and land values

– It is important to strive for perfection but don’t let that get in the way of being honest; don’t manipulate data beyond its limits; one paired sale isn’t the same as multiple and so on

• At the end, don’t forget to ask yourself, if the property is really worth the value stated!