vii-brunswickcounty.docVIP

Approaches to Value1 1. Cost Approach The cost method of valuation follows the general formula, MV = LV + (RCN – D). Where MV is Market Value), LV is Land Value, RCN is replacement cost new, and D is depreciation. Cost tries to replicate market value by adding an estimate of land value to the difference between the cost of the improvements and total depreciation. The cost approach is most applicable to industrial and special use properties for which market and/or income data is scarce or nonexistent. The value of the improvements can be developed through the use of cost manuals from such firms as Boeck or Marshall and Swift and then indexed for local economic conditions. Local construction firms and contractors are also a source for cost information and verification for the indexing of data from manuals. Depreciation is the loss, from all causes, in value of the replacement cost new. The simplest form is that caused by aging. Newer homes will sell at a higher price than similar homes built at an earlier date. This is because normal wear and tear, neglect and physical decay begin to affect the structure and therefore its marketability. The method used for normal depreciation will be the economic age-life method whereby a lump sum is deducted from the RCN. This sum is a function of actual age and effective age (effective age is the age indicated by condition and utility and may be less or greater than chronological age) and perceptions by the market. The figure is developed into a percentage adjustment. The RCN is multiplied by this adjustment. Functional and economic depreciation are then deducted if applicable. Two other forms of depreciation exist. They are functional and economic obsolescence. Functional obsolescence is the inability of the structure to adequately fulfill its purpose given current market demand and the state of construction technology. A rather common example of this is being over built. An owner of a home with 3000 square feet of