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Development (Residual) Method
The development method values property by the land value and the depreciated value of any improvements. It does not value a property as a whole. Rather the development method adds up the separate values of the land and improvements. It is used for:
vacant land
buildings that require major redevelopment
land and buildings having public service or heritage characteristics for which profit figures cannot be obtained since these properties do not generate significant, if any, income and it is difficult to find recently sold comparable properties in the local market. Examples are schools, and buildings used for religious and social purposes.
The steps involved in the development method are:
Estimate the value of the land as if vacant
Estimate the replacement cost of the building
Estimate the building's loss in value from depreciation
Subtract the building's depreciation from the estimated replacement cost
Calculate the value of the property by adding the estimated land value to the depreciated value of the building
There are 2 methods of estimating what it would cost to replace the structure:
The reproduction cost is the cost of duplicating the subject property's structure completely
The replacement cost is the cost of building a similar structure, but using modern construction methods and materials
The replacement cost is also usually lower than the reproduction cost. Because the former uses modern designs, techniques and materials its eliminates obsolete and undesirable features found in older buildings which are generally more difficult to maintain.
There are 3 methods of estimating the reproduction or replacement cost:
The quantity-survey method estimates the separate costs of construction materials (wood, plaster, etc.), labour, and other factors and adds them together. It involves creating a detailed inventory of every item of material, equipment, labour, overhead, and fees involved in the construction of a property.This method is the most accurate but it is also the most expensive method and tends to be used for historical buildings.
The unit-in-place method estimates the cost of a property by summing the costs of the individual components of the property, such as materials, labour, overhead, and profit. This method combines direct and indirect costs into a single cost for a building component (the unit-in-place) which is then multiplied by the area of the portion of the building being valued to arrive at a total cost for that component.
The square-metre method (or comparison method) combines all the costs for a particular type and quality of a building into one value expressed as a cost per square metre (or cubic metre). It produces a value based on the floor area of a recently developed comparable property and then multiplies it by the square metre. Because the square-metre method ignores any difference in wall heights between comparable properties it is not considered as accurate as the other methods of estimation above.
Depreciation
Once the replacement cost has been calculated, depreciation must be estimated and then subtracted from the total value to arrive at a current value of the property. Depreciation is defined as a loss in value of a property due to any cause. Generally land does not depreciate unless it is has been recently improved or conversely degraded by erosion, improper use, or perhaps zoning changes.
Related Topics:
profit (accounts) method
income (investment) method
comparable method
contractor's (cost) method
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