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Depreciated Replacement Cost: Improving the Method Through a Variant Based on three Cornerstones

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  • Copiello Sergio

    (Department of Design and Planning, IUAV University of Venice)

  • Bonifaci Pietro

    (Department of Design and Planning, IUAV University of Venice)

Abstract

Within the scope of real estate appraisal, the Depreciated Replacement Cost method is mostly seen as a solution of last resort, when no other option is available. Nonetheless, it is ever more useful in addressing various estimation needs. In its basic formulation, the method suffers from several simplifications that lead to rather rough results. Here we try to go beyond these limits. To this end, we propose a variant based on the following three cornerstones. The first is the partition of the replacement cost into its fundamental components, at least according to three cost items: building structure, finishes, and installations. The second cornerstone is the formulation of different depreciation curves for each of the cost items mentioned above, by processing distinct data on useful life and residual life. Finally, the third cornerstone is represented by the definition of a complex depreciation function to take into account both the original useful life of the construction and its lengthening due to partial or full refurbishments.

Suggested Citation

  • Copiello Sergio & Bonifaci Pietro, 2018. "Depreciated Replacement Cost: Improving the Method Through a Variant Based on three Cornerstones," Real Estate Management and Valuation, Sciendo, vol. 26(2), pages 33-47, June.
    • Handle: RePEc:vrs:remava:v:26:y:2018:i:2:p:33-47:n:4
    DOI: 10.2478/remav-2018-0014
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    References listed on IDEAS

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    5. Bourassa, Steven C. & Hoesli, Martin & Scognamiglio, Donato & Zhang, Sumei, 2011. "Land leverage and house prices," Regional Science and Urban Economics, Elsevier, vol. 41(2), pages 134-144, March.
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    Cited by:

    1. Cupal Martin & Sedlačík Marek & Michálek Jaroslav, 2019. "The Assessment of a Building’s insurable Value using Multivariate Statistics: The Case of the Czech Republic," Real Estate Management and Valuation, Sciendo, vol. 27(3), pages 81-96, September.

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    More about this item

    Keywords

    depreciated replacement cost; replacement value; real estate appraisal; deterioration; obsolescence;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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