Question

In: Finance

You are appraising a five-year-old, single-family residence. The total square footage of the livable area is...

You are appraising a five-year-old, single-family residence. The total square footage of the livable area is 2,700. The garage is 500 square feet. According to figures obtained from a cost-estimating service, the base construction cost per square foot of livable area is $125 and $80 per square foot for the garage. The lot is valued at $98,000. What is the reproduction cost of the new structure?

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Expert Solution

Reproduction Cost

Reproduction cost is the cost to construct an exact duplicate of the subject structure at today’s costs. A reproduction cost estimate requires estimating the cost to construct plaster walls.Reproduction cost would be used for say historically or architecturally significant structures.

Methods

  • Square footage method: Involves calculating the cost of construction by multiplying the square footage of the structure by the construction cost for that particular type of building.

    For example, you’d multiply a $100 per square foot cost to build the kind of house you’re appraising by the 2,000 square foot total area of the house to arrive at a cost estimate of $200,000 to replace the structure. The square footage method is the one more commonly used by appraisers to estimate replacement or reproduction cost.

  • Unit-in-place method: Provides the cost to construct a building by estimating the installation costs, including materials, of the individual components of the structure. So if you know you need 1,000 square feet of sheet rock to cover the walls, you need to find out the cost of buying, installing, and finishing the sheet rock on a per-square-foot basis and then multiply by 1,000 square feet.

    Another approach to this method is to estimate the four main steps (units) to building a house. For instance, cost of foundation, cost of roof and framing, cost of mechanicals, and cost of walls and finish work. Each step is estimated separately and then all are added together.

  • Quantity survey method: More detailed than the previous method, it requires you to break down all the components of a building and estimate the cost of the material and installation separately. So in the sheet rock example, you estimate so many dollars each to buy the sheet rock, screws, and tape, and to pay for the installation.

  • Index method: Requires you to know the original construction cost (without land) of the subject building. You then multiply that original cost by a number that takes into account the increase in construction costs since the building was built. National companies that do this kind of research publish these numbers.

    If a building cost $20,000 to build originally, and the current index in that area for this type of structure is 1.80, the calculation is $100,000 x 1.80 = $180,000, or the cost to construct the same building today.

Reproduction cost of the new structure = Area * Cost per unit of Area

= 2700 Sqt * $125 + 500 Sqt* $80

= $337,500+$40,000

= $377,500


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