How to Estimate Replacement and Reproduction Costs for the Real Estate License Exam
You will need to know how to estimate replacement and reproduction costs for the Real Estate License Exam. Reproduction cost is the cost to construct an exact duplicate of the subject structure at today’s costs. Replacement cost is the cost to construct a structure with the same usefulness (utility) as a comparable structure using today’s materials and standards.
For example, you may use the cost approach to appraise a house with plaster walls. A reproduction cost estimate requires estimating the cost to construct plaster walls. A replacement cost estimate, however, estimates the cost to put up sheet rock walls according to the current standard.
Replacement cost is most often used in the cost approach. Reproduction cost would be used for say historically or architecturally significant structures.
Two types of costs are included in every construction cost estimate: direct costs and indirect costs. Direct costs, also called hard costs, are those expenses directly associated with the actual construction of a building, including labor and building materials. Indirect or soft costs are expenses not directly related to the physical construction process, including permit fees, architectural costs, and builder’s profit.
You should know the four methods for estimating reproduction or replacement cost. For exam purposes, your ability to distinguish among the four methods by their characteristics is sufficient. Generally, no calculations are required. The four methods include
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.