The appraisal process involves a comprehensive analysis of various factors that influence the value of a property. One critical aspect of the appraisal is the cost approach method, which is used to estimate the value of a property by determining the replacement or reproduction cost of its structural and non-structural components.

The cost approach method is based on the principle of substitution, which states that an individual will not pay more for a property than the cost of building an equally desirable substitute. Therefore, the cost approach method is useful for valuing unique properties, producing a reliable indication of market value, assuming a sound building replacement or reproduction cost estimate is made with appropriate accrued depreciation estimates.

Accrued Depreciation is a critical factor considered in the cost approach method, as it measures the total loss in value from all causes that have occurred as of the appraisal date. Depreciation is divided into three categories: physical deterioration, functional obsolescence, and external obsolescence.

Physical Deterioration occurs due to the wear and tear or breaking down of the physical structure, for instance, decay, vandalism, and damage by the elements. Physical deterioration is divided into curable and incurable defects. Curable defects refer to items that can easily be replaced or repaired at a cost that adds value to the property, while incurable defects refer to items that cannot be repaired or replaced at a cost that adds value to the property. The cost to cure the problem must be less than the value added for the defect to be considered curable.

Functional Obsolescence is due to a lack of functionality or inadequacies in the property’s design or components. This means that the property’s components or systems do not meet current market requirements or are substandard. Examples of functional obsolescence include poor room arrangement, insufficient closet space, and oversized heating and plumbing systems. Similar to physical deterioration, functional obsolescence is also divided into curable and incurable defects.

External Obsolescence is considered a loss in value resulting from conditions outside the property. These conditions include social changes in the neighborhood, proximity to a sewage treatment plant, oversupply of housing, or high rates of unemployment. External obsolescence is classified as incurable and can only be measured by capitalizing rental loss or by comparing it to similar properties without the obsolescence factor.

In conclusion, it is essential to have a comprehensive understanding of the cost approach method and how the different types of depreciation affect a property’s value. As legal professionals, it is crucial to work with qualified appraisers to provide sound guidance and advice in property disputes and appraisals. Understanding the principles of appraisal, including the cost approach method, can be beneficial when conducting legal cases related to property valuation.

References:

· Apogee Research, LLC. (n.d.). Cost Approach. Retrieved from https://www.apogresearch.com/learning-center/cost-approach

· International Association of Assessing Officers. (2003). Property Appraisal and Assessment Administration. Illinois: International Association of Assessing Officers.

· Lee, K. H. (1996). Property Taxation in the United States. Prairie Village, Kansas: International Association of Assessing Officers.

· Peterson, R. L., & Ferguson, R. W. (1980). Property Assessment Valuation. Englewood Cliffs, NJ: Prentice-Hall.