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6.2
Comparative &
Cost Methods
MATH
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 6.2 Comparative & Cost MATH RESIDENTIAL
(houses and condos)

1). COMPARATIVE (MARKET COMPARISON) METHOD:

Based on theory of “substitution” of “similar properties” which have recently been sold and are
comparable!

Similar properties:

• Building - design, construction, equipment (fixtures), age EMPTY LOTS

• Lot - proximity, dimensions, lot size (lot frontage is more important then depth or total (LAND)
area!) Corner lots don’t always provide better value!
• Title & Conditions of Sale
o If vendor supplied mortgages/agreements for sale have below market rates, the
sale price will be higher. Cheaper financing = Higher price
o Comparables must have similar title status
• Condos - common area charges & facilities need to be included as they vary from project
to project
PROBLEMS:
“Similar” “Recent” Arm’s length
Ø Difficulty in establishing similarity
with respect to factors when the market transactions - no
(unusual property)
judged important by conditions remain previous relationship
Ø Few comparable properties
buyers and sellers stable between the parties
(not many recent sales)

ADJUSTMENT FOR VALUE PRICE INDICES* *Indices = indexes

PRICE INDEX (CONSUMER or SHELTER)

Ø Irrelevant to the appraisal of
one particular property since
changes in the value of consumer
products are not necessarily the
same as changes in the value of
property.
Ø CANNOT be used to adjust the
sale prices (Under no
circumstances)

Rating Grid
Subject property is the
basis and all
comparables be
adjusted to it

IASS formula
Inferior Add +
Superior Subtract –
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 6.2 Comparative & Cost MATH
4 types of questions you
will be asked to solve for

Temple,
2). COST METHOD church, pulp
mill, windmill,
Land does NOT depreciate!!! concrete plant
• Nothing to compare – Unique
• Not on MLS
• No income - not an investment property

Infrequency of use:
Ø LEAST exact Approach! COST VS VALUE
Ø Difficulty to measure Depreciation
Ø If new buildings represent highest and best use
Ø COST equals VALUE is not necessarily correct
COST = VALUE
The RELIABILITY of the cost approach depends on the Ø If the cost of constructing a building is greater than
validity of the assumption that cost and value are equal what it will be worth on completion, new development
BUT is not necessarily correct. will STOP until building values rises
Ø If it costs less to construct a building than what the
building will be worth on completion, there will be an
COST OF WHAT? 3,000 sq. ft. x $10/sq. ft. = $30,000 increase in new development
Includes costs of:
• Planning
• Designing
COST OF IMPROVEMENTS
• Construction/Building
Historic cost - cost incurred when the building was erected
Cost of Improvements (building) Current cost - cost to construct building at date of appraisal
– Depreciation Reproduction cost - exact replica
Replacement cost - modern equivalent, may exceed its
+ Land Value (Site value)_
market value
= Market Value

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 6.2 Comparative & Cost MATH
DEPRECIATION
1. AGE-LIFE METHOD Effective Age Actual Age
reflects the appraiser’s estimate of
Relationship between a building’s age and its expected life
the subject’s condition relative to
• provides a rough estimate of building’s depreciation over time market norms
• commonly applied method in appraisal reports

% Depreciation (total, for age life) % Depreciation / Year

= Effective Age / Economic Life = % Depreciation / Effective Age

EXAMPLE: Find Depreciated Replacement Cost

1. % Depreciation =
1. % Depreciation 10/50 = 0.20 (20% for 10 years)
= Effective Age/Economic Life
Replacement cost (RP): $500,000 2. Age-life depreciation:
2. Age life depreciation amount ($), ALDA
= Replacement cost x % Depreciation Actual age of 15 years $500,000 × 0.20 = $100,000
Effective age of 10 years
3. Depreciated replacement cost
Economic life of 50 years 3. Depreciated replacement cost:
= Replacement cost – ALDA $
$500,000 – $100,000 = $400,000

2. BREAKDOWN METHOD

PHYSICAL FUNCTIONAL
Loss in market value loss in value caused by
caused by physical outmoded or
wear &tear inadequate design

CURABLE Physical Curable Functional Curable

Can be corrected Can be fixed cost Can be replaced cost
economically effectively effectively
(e.g.: paint, wallpaper) (eg: bathroom fixtures)
Cost of Improvements (building)
INCURABLE Physical Incurable Functional Incurable – Depreciation
Cannot fix Cannot be fixed Cannot be fixed + Land Value (Site value)_
economically economically = Market Value
(e.g.: foundation, (e.g.: floor plan, narrow
structural problems) hallways)

EXAMPLE: Find Cost of Improvements

An appraiser has determined the market value of a property to be $820,000 using the cost approach. In this estimate, the
appraiser has included depreciation of $45,000 and has appraised the value of the lot to be $430,000. How much has the
appraiser estimated as the cost new of improvements?

COST OF IMPROVEMENTS (COI) = MV + Dep. – Land/Site value

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 6.2 Comparative & Cost MATH
STEP 1 STEP 2

STEP 3 STEP 4

ANSWER

Questions
1). You have just been assigned to complete the appraisal of an old, two-storey house in Burnaby and are conducting
an analysis of comparable sales. You have found a comparable property that is similar in all respects except that
when sold, the seller arranged a buydown, offering the buyer an interest rate of 1.5% below the market rate. Which
of the following statements is/are TRUE?

A. The price the buyer paid may be less than the market value of the real estate because of the benefit the
buyer receives with below-market financing.
B. The price the buyer paid may be more than the market value of the real estate, because of the benefit the
buyer receives with below-market financing.
C. The financing terms of a sale have no bearing on its price, and therefore do not need to be considered when
analyzing comparable sales.
D. Non-market financing arrangements only warrant adjustments to the sale price of comparable properties if
market evidence suggests that they affect value.

(1) B and D
(2) D only
(3) A and D
(4) C only

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 6.2 Comparative & Cost MATH
2). The comparative method of appraisal is based on analysis of recent sale prices for similar properties. Which of the
following best defines the word “recent”?
(1) A period of time, immediately after the appraisal date, during which the market values in the surrounding area
have not risen.
(2) A period of time, immediately preceding the appraisal date, of no less than one week and no more than six
months.
(3) A period of time, immediately after the appraisal date, during which four properties have sold in the subject
property’s neighborhood
(4) A period of time, immediately preceding the appraisal date, during which property values in region have
remained stable.

3). Which of the following statements regarding the comparative method of appraisal is TRUE?
(1) The comparative method of appraisal should be used in the property which possesses latent value
(2) To apply the comparative method of appraisal, the appraiser estimates the market value of the subject property
using as evidence the sale prices of similar properties which were sold at any time prior to the appraisal
(3) The comparative method of appraisal is the most inexact approach for finding market value since cost and
market value are not necessarily equal at any particular time
(4) The comparative method reflects market behaviour and requires a minimum of subjective opinion from the
appraiser

4). An appraiser is using the market data approach for his appraisal of a single family house. By proper adjustment the
appraiser can use sales prices of all the following properties for comparison purposes, EXCEPT:
(1) Houses in different neighbourhoods.
(2) Houses with different square footage.
(3) Houses recently sold between related parties.
(4) Houses sold over six months ago.

5). In the comparative method of appraisal, it is MOST important that the subject building and the comparable
buildings be:
(1) Similar with respect to factors that have a major influence on buyers and sellers.
(2) Free from any mortgages on title.
(3) Of the same general architectural style.
(4) Constructed by either average or above average work workmanship.

6). You have a partially completed appraisal report that you need to fill in. The 2,300 square foot subject property has
4 bedrooms. The house next door is similar in all respects except for the number of bedrooms and square footage.
The 2,200 square foot comparable sold for $321,000 and has 3 bedrooms. If the market value of a bedroom is
$3,200 and above an 1,800 sq. ft. benchmark, each 100 sq. ft. is worth $5,000, the adjusted sale price for this
comparable is:
(1) $329,200
(2) $312,800
(3) $323,700
(4) $318,300
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 6.2 Comparative & Cost MATH
7). You have a partially completed appraisal report that you need to fill in. The subject property has 4 bedrooms and 4
bathrooms. The house next door is similar in all respects except for the number of bedrooms and bathrooms. It sold
for $225,500 and has 3 bedrooms and 3 bathrooms. If the market value of a bedroom is $4,000 and the market
value of a bathroom is $5,700, this comparable will have to be adjusted for bedrooms and bathrooms by:
(1) –$4,000 and –$5,700 respectively.
(2) +$6,400 and +$5,700 respectively.
(3) +$4,000 and +$5,700 respectively.
(4) +$5,700 and +$4,000 respectively.

8). You have a partially completed appraisal report that you need to fill in. The 2,000 square foot subject property has
4 bathrooms. The house next door is similar in all respects except for the number of bathrooms and square footage.
The 2,100 square foot comparable sold for $326,500 and has 3 bathrooms. If the market value of a bathroom is
$2,700 and above an 1,800 sq. ft. benchmark, each 100 sq. ft. is worth $5,000, this comparable will have to be
adjusted for bathrooms and square footage by:
(1) –$2,700 and +$5,000 respectively.
(2) +$5,000 and –$2,700 respectively.
(3) +$2,700 and –$5,000 respectively.
(4) +$5,400 and +$2,700 respectively

9). You have a partially completed appraisal report that you need to fill in. The house next door to the subject property
is similar in all respects except for the number of bedrooms and square footage. This 2,300 square foot comparable
sold for $250,000, has 4 bedrooms, and was adjusted +$4,200 for bedrooms and +$15,000 for square footage. If the
market value of a bedroom is $4,200 and above a 1,900 sq. ft. benchmark, each 100 sq. ft. is worth $5,000, it can be
concluded that the subject property has:
(1) 5 bedrooms and 2,300 square feet.
(2) 4 bedrooms and 2,000 square feet.
(3) 3 bedrooms and 2,200 square feet.
(4) 5 bedrooms and 2,600 square feet.

10). You have a partially completed appraisal report that you need to fill in. The subject property has 4 bedrooms and 4
bathrooms. The house next door is similar in all respects except for the number of bedrooms and bathrooms. It sold
for $234,000 and was adjusted -$4,000 for bedrooms and +$5,700 for bathrooms. If the market value of a bedroom
is $4,000 and the market value of a bathroom is $5,700, you can conclude that the comparable has:
(1) 5 bedrooms and 3 bathrooms.
(2) 4 bedrooms and 4 bathrooms.
(3) 3 bedrooms and 5 bathrooms.
(4) fewer bedrooms and fewer bathrooms than the subject.

11). Which one of the following is TRUE where a comparable property is sold subject to a vendor supplied mortgage at
an interest rate lower than the current market rate?
(1) The comparable property may never be used as evidence of market value.
(2) The comparable sale price must be adjusted upward.
(3) The comparable sale price may only be used as evidence of market value.
(4) The comparable sale price must be adjusted downward.
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 6.2 Comparative & Cost MATH
12). The cost approach of appraisal is NOT generally used to value:
(1) airport hangars.
(2) vacant lots.
(3) condominiums.
(4) single-family residences.

13). Reproduction cost is best defined as :

(1) The historic construction of a building which would provide the same utility as the subject property.
(2) The current cost of moving the building to a site where the building would represent the highest and best use of
that site.
(3) The original cost of construction, adjusted for inflation.
(4) The current cost of construction an exact replica of the subject property.

14). The loss in value caused by outmoded or inadequate design in building is:
(1) Salvage value
(2) Physical depreciation
(3) Functional depreciation
(4) Capital value allowance

15). Which of the following is Functional Curable?

A. Old Wallpaper in the master bedroom
B. Brass Faucet in the bathroom
(1) A and B
(2) None of them
(3) Only A
(4) Only B

16). In using the cost method of appraisal, the MAJOR difficulty is experienced in calculating:
(1) Incurable physical depreciation
(2) Curable functional depreciation
(3) Curable physical depreciation
(4) Replacement cost of the building as new

17). In appraisal, an outdated feature that can be corrected economically is best known as:
(1) functional incurable depreciation
(2) physical incurable depreciation
(3) functional curable depreciation
(4) physical curable depreciation

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 6.2 Comparative & Cost MATH
18). You are assignment the task of appraising a small apartment building.
Current construction costs are $101 per square foot, the total area of the building is 10,000 sq. ft. , the land value is
estimated to be $300,000, and the Gross Potential Rent from the building is estimated as $120,000. The building
was built 4 years ago, and is deemed to have depreciated 10% in this time. It has been determined that a
reasonable capitalization rate is 11%. Using the cost method of appraisal, estimate the market value of the building.
(1) $1,010,000
(2) $1,209,000
(3) $1,179,000
(4) $1,090,909

19). Fred Jones wants to determine the market value of his property. Unfortunately, he lives in a sparsely inhabited
region where there are no recently- sold, similar properties. However, he does know that the replacement cost (
new) of his 1,350 sq.ft. house is $38.50 a square foot. The site value estimated using the comparative method of
appraisal is $37,500.
Mr. Jones has not taken adequate care of his house and it has depreciated in value. There has been $12,200 of
curable physical depreciation. In addition, the bathroom and kitchen fixtures are outdated; their replacement cost
is $ 6,300.Based on the above information, what is the market value of Mr. Jones’ property?
(1) $51,975
(2) $89,476
(3) $70,975
(4) $77,275

20). You have been assigned the task of appraising the Oak Park community Center in Diggston, BC. The land on which
the centre is built was purchased 8 years ago at a cost of $18,000; similar lots today sell for $28,000. The centre, a
4,000 sq. ft. Structure, was originally built at a cost of $38 per sq. ft. replacement cost (new) today would be $57
per sq. ft.
You estimate that an appropriate depreciation factor would be 30%. Using the cost method of appraisal, the correct
estimate to the market value of the centre would be:
(1) $187,600
(2) $119,000
(3) $177,000
(4) $170,000

21). An appraiser has determined the market value of a property to be $820,000 using the cost approach. In this
estimate, the appraiser has included depreciation of $45,000, and has appraised the value of the lot to be $430,000.
How much has the appraiser estimated as the cost new of improvements?
(1) $430,000
(2) $435,000
(3) $345,000
(4) $340,000

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 6.2 Comparative & Cost MATH
22). An appraiser has determined the market value of a property to be $620,000 using the cost approach. In this
estimate, the appraiser has included depreciation of $20,000 and has appraised the value of the lot to be $360,000.
How much has the appraiser estimated as the cost new of improvements?
(1) $240,000
(2) $280,000
(3) $320,000
(4) $360,000

Answers: 1(3), 2(4), 3(4), 4(3), 5(1), 6(1), 7(3), 8(3), 9(4), 10(1), 11(4), 12(2), 13(4), 14(3), 15(4), 16(1), 17(3), 18(2), 19(3),
20(1), 21(2), 22(2)

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