Cost Approach Breakdown Method Help

[MusicGirl]

I'm seeing differences in the way this method is being taught. Here are the different version I've seen lately:

Total reproduction cost
-cost to cure curable physical items
-current cost of incurable short-lived items
equals undepreciated cost of long-lived items--and from there it's OK

Total reproduction cost
-cost new of curable physical items
-cost new of incurable short-lived items
equals undepreciated cost of long-lived items--etc.

Total reproduction cost
in this example there were no curable items
-depreciated cost of incurable short-lived items
equals undepreciated cost of long-lived items

After thinking about this I agree with number three, because the others have you taking out too much from the actual long-lived portion, if the depreciation is not factored in. I wish number three had the curable items so I could see how that was handled. I'm thinking just subtracting the cost to cure would be right for that, or would it be the cost new of these items minus the cost to cure? All this thought about the breakdown method is at least really helping me learn it, whichever way it's supposed to be done!

 

[Terrel L. Shields]

I am thinking I don't understand the question...you should have had an answer by now if it was plain to anyone else. So I will take a stab at it.

First, I don't do REPRODUCTION cost. I do REPLACEMENT cost because the cost books are replacement cost. If you use replacement cost then the curable aspect of a remodeled home disappears and you don't have to deal with that.

depreciated cost of incurable short-lived items equals undepreciated cost of long-lived items

The basics of the Breakdown method is to divide depreciation into its 3 components.

Physical curable are deferred maintenance items that will generally return as much or more value than it costs. - touching up, plumbing and AC usually fall under that category.

Physical incurable might be cracks in the foundation, termite damage, etc. Items that cost more to fix than the market will reward you with. Those can be divided into short and long-lived items.

So curable and incurable apply to functional items as well, and superadequacy is "over-built"...

Anyway, I would not agree that "depreciated cost of incurable short-lived items equals undepreciated cost of long-lived items". These are mutually exclusive items.

 

[MusicGirl]

In an attempt to be clear I actually created more confusion. The dashes were supposed to be minus signs, and there was no equal sign so I just wrote it out.

So if replacement cost eliminates the need to deduct curable deferred maintenance, then the only other question I have is, to get the undepreciated long-lived amount, do you deduct the depreciated short-lived items or the whole current cost of these items? I vote for the depreciated cost, because both the long-lived and short-lived elements will have depreciation, but it's often not taught that way. Thanks for responding.

 

[Terrel L. Shields]

I mis-spoke too. Replacement cost eliminates the need to deal with incurables. Say a house has been added on. Part is 50 years old, part is 20 years old, and because of the addition, you have to step down from one part to the other although it is "one-story". Replacement cost would assume it was all one building and that step would be eliminated, thus you are not confronted with dealing with reproducing the same configuration and defects. Those are functional issues, so the only functional issue to deal with would normally be that of being overbuilt (super-adequate like an elevator normally would be) or inadequate (say they ran out of money and lacked finishing the interior doors, trim around the windows and doors, etc.)

So if you are left with only the short and long-lived items, to estimate the contribution of the long-lived items, yes you need to estimate the contribution of the short lived ones. So say the stove and dishwater are 15 years old but functioning. They obviously (by the book) are near the end of their economic lives and "updating" the kitchen is likely a curable situation.

The measure of curable functional is the difference in the cost to replace the house with the curable items included and to reproduce the house on the same date without it. Say a house needs new carpet because it is out of date but the existing one is still functional. The defect isn't the cost of new carpet. It is the difference in the cost of new carpet and the contribution of the existing one.

When you get a complaint from a homeowner that "We just spent $30,000 remodeling the kitchen but you only added $15,000 to the appraisal", it is almost always because they tore out a functional but dated kitchen and replaced it with the new one. Buyers pay for that functional kitchen and replace it at their own expense. The market expects a house to have a kitchen...old or new.

Say another example would be the "run out of money" scenario. Time flies by. 10 years and finally the HO installs new trim, paints the walls, and hangs and finishes the interior doors. Those "new" items will take on the overall depreciation of the building, so they may be "new" but are going to end up being treated as if 10 years old.