Estimating Replacement & Reproduction Costs in Real Estate

Instructor: Eileen Cappelloni

Eileen worked for the Orange County Asssociation of Realtors for 31 years. She has written real estate courses and exams for other publishing companies

What are the differences between estimating the replacement cost and the reproduction cost in real estate appraisal? How do you estimate them using the cost approach to real estate valuation? Learn about the different approaches in this lesson.

Home Damage

Say you own a beautiful home in Florida. You love the ocean location, but the house is 50 years old and could use some remodeling.

Soon though, a freak storm streaks through your neighborhood and a huge palm tree crashes onto the side of your home and destroys one wall and five windows. You don't have to worry, though; you have insurance!

Reproduction and Replacement Costs

Your house has plaster walls and old windows. You could put in another plaster wall in place of the original. Reproduction cost is the actual cost of building an exact duplicate of something using the same materials used in the original construction.

However, your insurance policy contract will most likely show the replacement cost, which is the cost required to replace an existing asset with an equal or similar asset at today's market price. In other words, you will pay to construct a wall that will not necessarily be made of plaster, but will have the same function.

Replacing the windows using the reproduction approach is even more difficult. You cannot replace the old windows with the same original quality windows, because the manufacturer went out of business 20 years ago. Also there are newer building codes in Florida that require the installation of windows manufactured to withstand high winds and strong storms.

So why would you ever use the reproduction cost method?

Let's say you purchased home in a historic preservation district. Your deed may very well restrict you from changing anything in the house, regardless of whether or not it may be feasible to replace it with an exact duplicate.

Depending upon the extent and type of alteration or renovation, you may not be able to change even the heating system with a more up-to-date system. Naturally, the cost of replacing items with an exact replica of the original could be more expensive and impractical.

Method Determining Costs

There are four methods used to determine replacement or reproduction costs. They are:

  • the square foot method - multiply the square footage of the structure by the construction cost for either that type of building or an exact replica of it.
  • the unit in place method - estimate the entire cost of erecting the structure, including materials, labor costs and any charges related to permits or other fees of construction.
  • the quantity survey method - separate each component of the structure and fully enumerate each detail, including screws, materials, rulers, etc.
  • the index method - research the actual original construction cost of the building, then add that to the cost of building today.

Market Value

Here's a relatively simple formula to help determine a property's market value, which is the approximate value of the property on the free market.

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