Property Valuation
In the cost approach to value, the appraiser estimates the value of land separately from improvements because:
ALand value is set by the county assessor and cannot be changed
BLand does not depreciate, while improvements (buildings) do depreciate over time✓ Correct
CThe IRS requires separate land and building values for depreciation purposes
DLenders only loan on the building value, not the land
Explanation
In the cost approach, land is valued separately because land is considered indestructible and does not depreciate—only the improvements (buildings) depreciate over time. The cost approach formula is: Value = Land Value + Reproduction/Replacement Cost New of Improvements - Accrued Depreciation.
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Key Terms to Know
Depreciation
A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Math Concepts
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