11.3 Reconciling the Cost Approach

The Last Cost-Approach Step on the ECO

After cost sources, cost components, physical/functional/external depreciation, and depreciation methods, ECO V.g asks you to reconcile to an indicated value by the cost approach. That is both:

1. Internal reconciliation — bring land, cost new, and depreciation into one coherent indication.
2. Role of that indication — know when it deserves primary weight in the final value opinion (Area VII) versus when it is secondary support.

The Indicated Value Formula

Indicated value by cost approach =
Site (land) value + Cost new of improvements − Accrued depreciation

Equivalently:

Site value + Depreciated cost of improvements

Improvements usually include the building and site improvements (flatwork, landscaping, fencing) unless the stem values bare land and structure only. Land is not depreciated.

Worked problem 1 — Complete cost approach

Narrative reconciliation note (exam level): Land from three lot sales; RCN from local cost service with entrepreneurial incentive included; depreciation by modified age-life supported by market extraction at ~23%—indication rounded to $460,000.

Worked problem 2 — Build depreciation then reconcile

Land: $200,000
RCN: $800,000 (includes entrepreneurial incentive)
Curable physical: $20,000
Age-life on remainder: EA 10, TEL 50 → 20% × ($800,000 − $20,000) = $156,000
Functional incurable: $40,000
External: $30,000

Total depreciation = $20,000 + $156,000 + $40,000 + $30,000 = $246,000
Depreciated improvements = $800,000 − $246,000 = $554,000
Cost approach indication = $200,000 + $554,000 = $754,000

Worked problem 3 — Two depreciation methods, one indication

Sometimes you compute depreciation two ways and reconcile depreciation before finishing value.

Reconcile depreciation to $175,000 (breakdown detailed; extraction corroborates; age-life slightly high).
Land $90,000 + ($360,000 − $175,000) = $275,000 cost-approach value.

You do not average three different final values built on inconsistent land or cost bases. Reconcile inputs, then compute one indication.

When the Cost Approach Is Most Reliable

Exam phrasing: “Most applicable,” “most reliable,” or “given greatest weight” when the property is new special-purpose with few sales—choose cost approach.

When the Cost Approach Is Least Reliable

Exam phrasing: For a 50-year-old house in an active subdivision with many comps, sales comparison usually gets more weight than cost—even if you still develop cost.

Reliability Spectrum (Memory Table)

Combining Land + Depreciated Improvements — Consistency Rules

1. Same effective date for land, cost, and depreciation.
2. Same HBU premise — do not add land valued for multifamily redevelopment to a single-family house you assume remains forever without analyzing as-improved HBU (consistent use).
3. Site improvements — if included in cost new, do not also bury them entirely in “land” without coordination.
4. Rights appraised — leased fee land residual ≠ fee simple land without adjustment.
5. Units — whole-property indication; do not mix per-SF building cost with wrong SF (gross living area vs gross building area).

Worked problem 4 — Inconsistent HBU trap

Land as vacant for commercial pad: $500,000.
Existing house RCN $200,000; depreciated contribution $80,000 if continued residential.
Blind sum $580,000 may be wrong if HBU is demolish for commercial: then value ≈ land − demo, and residential building contribution may be $0 or negative net of demo. Cost approach under continue residential is a different premise than redevelop commercial. Reconcile the use first (Chapter 4), then the dollars.

Cost Approach vs Final Reconciliation

Example final weighting vignette:

National Exam items may ask which approach gets most weight—not always the numeric average.

Common Exam Errors (High Yield)

Worked problem 5 — Spot the error

Candidate’s work: Land $100,000; RCN $300,000; EA 30; TEL 50; depreciation 30/50 × $400,000 (land+building) = $240,000; value = $100,000 + ($300,000 − $240,000) = $160,000.

Errors: (1) life ratio applied to land+building base; (2) inconsistent bases.
Correct: Dep = 0.60 × $300,000 = $180,000; depreciated improvements $120,000; indication $220,000.

Worked problem 6 — Reliability judgment

Stem: 1970s warehouse, special design, no local sales of similar properties, land sales available, cost manual supportable, depreciation estimated by breakdown with engineering support.

Most reliable approach? Often cost (special-purpose, limited sales).
Alternate stem: 2019 production home, 12 closed sales within 1/2 mile in 6 months—sales comparison most reliable; cost is a check.

Quality Control Checklist Before You “Lock” the Cost Indication

1. Land method stated and math checked.
2. Cost new: direct, indirect, entrepreneurial incentive (as applicable).
3. Reproduction vs replacement identified.
4. Depreciation method(s) fit the data (age-life / modified / breakdown / extraction).
5. No land depreciation; no double count.
6. HBU and rights consistent.
7. Final addition: land + depreciated improvements = one indicated value.
8. Sensitivity: if EA ±2 years or land ±10% swings value wildly, note lower reliability in reconciliation narrative (exam: expect recognition that old properties are sensitive).

Chapter 11 Synthesis

Formula card:

1. Age-life % = EA / TEL; Dep $ = % × CN
2. Modified: Curable + (EA/TEL) × (CN − Curable)
3. Extraction: Dep = CN − (Price − Land)
4. Cost approach value = Land + CN − Dep

Area V is calculation-heavy at CR and still material at LR/CG. If you can depreciate correctly and know when the resulting indication is trustworthy, you convert cost-approach items into reliable points and support cleaner final reconciliations in Area VII.