The art of real estate cost calculation

Published: 24th January 2012
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The formula for the calculation of real estate costing is:


Substitution or replacement cost of improvements - Accumulated depreciation + value of the property = value of the property


The value of land should be calculated separately and then add it to the depreciated cost of building structures. The value of the property is usually calculated using the principle of comparative prices of sales; it analyzes the location and improvements (except buildings) of the property subject. Because the technique involves the sum of values obtained for building and land separately, it is also called the value added method


How to apply the formula for the cost calculation technique

Certain properties valued for its antiquity and its price is set accordingly, the designation as a monument heritage can be a blessing or a misfortune (because it requires investment for habitation).


There are several drawbacks in the application of this method as not being giving it the highest and best use of the land, so that an analysis can be idle. As is becomes the commercial property, it is common to increase the value of the land. The value of any structure may also increase, but those recorded highest increase will be adaptable to business.


Construction cost

The appraiser always begins its work by a current price estimate of the cost of constructing a new building that is physically or functionally identical to the subject to valuation. The construction cost estimated by the appraiser will be the cost of substitution or replacement of the subject


Cost of substitution

The replacement cost is the amount in money that is required to produce an exact duplicate of a building at current prices. For those old buildings that have attained the status of "historic" the task becomes considerably more difficult. For properties that are not economically viable replacement cost, the appraiser estimates the cost instead of replacement of structures.


Replacement cost

Current price is the construction of a building that has the same utility structure subject, of course will be noted as a condition for the appraisal, it is impossible to exactly duplicate the subject property on the market today. Some top real estate brokers in India are the leading source of calculation of replacement cost.


How to find the cost of substitution

There are four methods for the cost calculation of a building:

  1. Square meters - The current cost of construction per square meter, the type of building that is being evaluated, multiply by the number of square meters that is the subject property.

  2. In-situ units are estimated construction cost per unit of measurement, usually square meter of each building component of the subject, including the amounts of money needed for materials, labor, overhead and builder's profit. The cost per measurement is then multiplied by the number of units of the component part in the building subject. In some cases, the unit is a single item, like a plumbing fixture rather than a measure of area. They are calculated on the basis of cost per unit and the type of foundation required.

  3. Cost study is the separated direct and indirect costs of construction and then comes the total cost. Direct costs are those associated with the materials and labor, indirect costs include costs such as building permits, taxes on payroll and utility of the builder.

  4. Indexing - The appraiser applies a factor, which represents the change in construction costs over time, the original cost of the subject property.

Accumulated Depreciation

It is the loss of value resulting from multiple causes, in fact, for any reason. Accumulated depreciation is the total loss of value resulting from all causes at the date of valuation. There are three basic forms of depreciation:


Physical deterioration, functional obsolescence and external obsolescence (lama is also environmental, economic or location). The property will experience some form of depreciation throughout their economic life, economic life is not necessarily expected to last long in the building, its physical life. If a building has received regular maintenance and repairs, life may be less effective than their actual age


Method of age / economic life

The construction cost is divided by the number of years of economic life to find an annual depreciation amount of money. This amount is then multiplied by the effective age of the property to determine the total amount that has been depreciated.


Observed condition method

Property is analyzed in terms of each of the individual categories of depreciation, is taken note of the possible repair of each item of depreciation, that is, if you can fix or replace the damage easily and economically, or if it is incurable, also known as a method of decomposition.


Market comparison method

It uses the sales prices of comparable properties to get the depreciated value of a property through the analysis of sufficient comparable, the appraiser isolates the depreciated value of the property.



Author recommends investing in plots in Greater Noida for best return on investment in Indian real estate.


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