In estimating land value under the cost approach, comparable land sales serve as the best evidence of market value. To value the land occupied by a church, an effort would he made to secure data on the sales of vacant land similar in most respects to the site occupied by the church building. Since the cost approach is often relied upon for public building:, churches, and special-purpose industrial property, consider-able difficulty arises in obtaining reasonably comparable land sales. Frequently the sale of similar property which includes a building must be used. The land value of a comparable building is derived by deducting the estimated building value from the sale which includes both land and buildings. Because of the subjectivity involved in obtaining land sales data which are not always very comparable, alternative approaches to value tend to be preferred.
Cost Approach Evaluated
If it is stated that 2,000-square-foot, single-family dwelling costs P31.50 per square foot to build, it does not follow that the building is worth P63,000, plus the value of a P15,000 lot. First, the cost per square foot may not be typical of local costs. Second, the land value estimate may lack accuracy, and third, the building may be subject to depreciation because of a poor floor plan, an obsolete design; poor workmanship, or inappropriate building materials.
Cost Approach Limitations. The main reasons for inaccurate cost estimates may be summarized in five points:
1. It is not always clear that the cost estimate includes architect’s fees, which may vary from 2 percent to 10 percent of the building cost, depending on the services rendered.
2. Selling costs vary widely; the cost estimate may not consistently include normal costs of sale. 3. Costs vary because of differences in the quality of workmanship.
4. Contractors vary widely in their level of efficiency.
5. The cost estimate should include an allowance for overhead and profit, which is highly variable among building contractors.
In addition to these causes of cost variation, variations in the quality of materials cause building costs to vary. A linoleum floor costs less than vinyl tile or wall-to-wall carpets of good quality. A similar generalization may be made with regard to kitchen cabinets, plumbing fixtures, and the many other features of a building. It is also generally true that a contractor who builds only five houses a year would have higher per unit costs than would a contractor who builds 100 houses per year. In the latter case, quantity discounts and the more efficient use of specialized labor lead to lower per unit costs of construction. In using the cost technique, assumptions must be made on these items. Such assumptions vary among appraisers.
The most questionable part of the cost technique relates to the depreciation estimate. Even though depreciation is shown separately by physical, functional, and economic components, in the final analysis the appraiser must make a personal value judgment to reduce the new cost estimate to market value. For these reasons, the cost technique is generally confined to special purpose properties for which market and income data are unavailable. This point is demonstrated by the application of the cost approach to an industrial building constructed in 1890. Because the appraisal covers a four story structure of obsolete construction, the valuation is based on the replacement cost. The depreciation is calculated on percentages which admittedly are highly subjective. To this extent the appraisal depends on the judgment of the appraiser, who presumably has a background in industrial appraising. And even in this instance, the valuation tends to be highly subjective. Personal value judgments on depreciation tend to be supported by the analysis of new and old industrial buildings and by interviews with in-formed industrial building owners, contractors, and industrial REALTORS. The estimated market value of P3,560,000 shown includes the estimated land value, which was derived from comparable sales of similar industrial acreage.