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Cost Approach Real Estate | Real Estate Exam Prep Videos - YouTube
Channel: The Real Estate Classroom
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[Music]
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hey everyone my name is paul vachesky
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and welcome to real estate classroom
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youtube channel real quick before we
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get started on today's video give this
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video a thumbs up hit that red subscribe
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button click on the notification bell
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comments
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any questions down below i would
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appreciate it in today's video
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one of the three types of specific
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appraisals we're going to talk about
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this one is the cost approach to
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valuation everything you need to know
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for your real estate exam coming up
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in this video
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[Music]
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so in this video we're going to discuss
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a specific type of appraisal called the
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cost
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approach to valuation now we're going to
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review the other two because if you're
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studying for your real estate exam
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you cannot review enough there are three
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types of appraisals or approaches to
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appraising
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or determining value you have to know
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the first one is the sales comparison
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approach i already did a video on that
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one
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and then there is the cost approach
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that's the one we're doing today and
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then the third one
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is an income approach that'll be my next
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video we're going to discuss how we come
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to value
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using income that a property generates
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using the gra the gross
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rent multiplier key real estate term you
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need to know
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and uh the capitalization rate also a
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key real estate term
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you need to know but in today's video
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it's all about the cost approach
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you've seen this slide before in a
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previous video the cost abroa
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approach is used for those unique type
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properties those properties where there
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are no
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comparables and there is there are no
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income streams to
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to use to to derive a value and these
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are properties such as
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churches or municipal buildings or
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hospitals or
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or even new construction if it's never
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been occupied because if it's never been
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occupied then it's not subject to
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depreciation
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the other thing to understand about the
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cost approach to appraisal
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is it's the only approach that takes in
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to consider
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into consideration depreciation
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and depreciation is a key real estate
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term that you have to know and we will
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define it more on the next slide there
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is the formula right there
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replacement cost minus depreciation
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we add back in the land value that gives
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us our appraised value now
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another thing to understand about the
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cost approach it's the only type
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real important remember this it's the
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only type of approach
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to valuation that takes into
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consideration depreciation i know i've
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killed that dead horse but i really want
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you to
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to grasp that now there is your formula
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we're going to talk about
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all three components the first one in
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our formula
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is replacement cost now notice i have
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replacement cost
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versus reproduction cost reproduction
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cost is the first time we've talked
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about this term and you have to know it
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so
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most cost approach to appraisals takes
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into consideration
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replacement costs now that is the cost
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required
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to rebuild that church or that hospital
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in today's dollars creating a
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reasonable duplicate of the current
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structure
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that's the key a reasonable duplicate in
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today's dollars because remember
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building costs today are much more than
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they were when that
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original church was built that is
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reasonable a replacement cost
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now what's reproduction cost there are
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times when an appraiser is doing an
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appraisal on a very very unique building
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such as a
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a building that's on a let's say a
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historical registry where if it burns
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down
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we want to replace that that that
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improvement in the exact
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manner that it was it we're going to
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create an exact
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duplicate of that dwelling or that
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improvement
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if we're going to do that then we have
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to do an appraisal called rep or we're
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gonna have to use what's called rep
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reproduction cost it's exactly
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like the subject property those are the
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differences between those two terms
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part two of our formula depreciation now
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i've already
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uh previously defined it but
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depreciation is in real estate
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is simply a loss in value
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for any reason any reason now here are
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three types of depreciation that i've
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put on your screen we have physical
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depreciation
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we have functional obsolescence and we
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have economic
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obsolescence and understand that all
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three
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of these types of depreciation can be
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what's called curable
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or incurable depending on the dollar
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amount
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it's going to take to bring it
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up to code or bring it in line with the
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neighborhood or whatever the case may be
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so for example physical depreciation
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this is from normal wear and tear did
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the owner
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maintain the property replace the roof
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did they do painting when they should
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have
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those type of things and there are times
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when a an owner allows a property to so
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deteriorate that it becomes incurable
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think about condemned homes most
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condemned
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properties for the most part are beyond
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repair
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it would cost too much money to bring
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them up to standards
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and it's cheaper just to tear them down
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and put something new on the lot that's
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an example of
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incurable physical depreciation
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now functional obsolescence can be
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curable or incurable and the determining
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factor is typically
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the floor plan if if a home just needs
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to be
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maybe the kitchen is outdated or the
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bathrooms are outdated that's not
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typically
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incurable however if it's a bad
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floor plan in the first place and it's a
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six bedroom home and there's only one
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bathroom
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that's probably incurable because the
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amount of work that it's going to take
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to restructure that
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building or that home to put in
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additional bathrooms the cost
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it's cost prohibitive so that would be
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an example of an
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incurable functional obsolescence
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the last one is economic obsolescence
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again it can be curable or incurable but
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it's not curable by the individual a
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homeowner
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which is unique to the other two um this
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is where a community is regressing or
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progressing
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okay so if a the housing stop stock of a
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community is declining uh that may be
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incurable for that home no matter how
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good that individual home is
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and then the third part of our component
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is land value
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and this is interesting because an
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appraisal when they're doing a cost
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approach is actually going to use a
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sales comparison approach to determine
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the value
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of the land so those are your three
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components to the cost approach
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now let's put numbers to it so on your
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screen we have the formula you have to
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know this formula for your real estate
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licensing exam you just do
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so just put commit it to memory but
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let's put
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numbers to this formula so let's say
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that an appraisal or appraiser
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they have determined that this church
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that they're doing cost a cost
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approach to evaluation on the appraiser
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has determined to
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replace this church is going to cost a
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half a million dollars
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in today's dollars and again how did
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they come up with that number well the
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appraiser does belong to certain types
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of services that they become members of
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will give them all the information that
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they need to do these types of
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appraisals
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you don't have to know that for your
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real estate exam so
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500 000 replacement cost the
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the the appraiser has determined the
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subject property the current
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the current church that we're trying to
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determine the valuation on
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he or she has determined there's a
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hundred and twenty thousand dollars in
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depreciation now remember we only
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depreciate the improvements
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not the land we never depreciate land
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period
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and then we add back in the land value
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that the appraiser actually did a sales
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comparison approach
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to determine the land value uh he or
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she's determined that the land is worth
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250 000. we do all of our adding and
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subtracting
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and we come up with an appraised value
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of 630
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000 this is how we come to
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valuation using the cost approach
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now don't forget this is so important
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guys as you're studying for your real
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estate exam
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three types of appraisals there is the
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sales comparison approach the cost
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approach
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and the income approach i've already
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done a video on the sales comparison
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approach if you want to learn more about
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the income approach
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video number one discussing the grant
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the the gross rent multiplier is right
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here to my right
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uh if you have not subscribed to the
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channel click on the little circle to my
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left
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comments or questions put down below i
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would appreciate that
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that's all i got i'll see you in the
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next video
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