A newly built home has extensive, reliable data on land values and on development costs, including market-derived entrepreneurial profit, for similar recent projects. How does this bear on reconciliation?
Correct Answer
D) It can support attributing significant accuracy to the cost approach
If a large amount of data on land values and development costs, including market-derived entrepreneurial profit, is available for similar new properties, the appraiser may attribute significant accuracy to the cost approach.
Why This Is the Correct Answer
Option D is correct because a large amount of reliable data on land values and development costs, including market-derived entrepreneurial profit, for similar new properties allows the appraiser to attribute significant accuracy to the cost approach. For a newly built home, depreciation is minimal, so the main uncertainties in the cost approach are reduced. The word can matters: the data support reliance but the appraiser still weighs all indications.
Why the Other Options Are Wrong
Option A: It requires the cost approach to receive no weight
Option A is wrong because strong land and cost data do not require the cost approach to receive no weight. Such data point the other way, supporting greater reliance on the cost approach.
Option B: It makes the income approach the most reliable
Option B is wrong because data on land values and development costs say nothing about the reliability of the income approach. Those facts strengthen the cost approach, not income capitalization.
Option C: It has no bearing, since the cost approach is excluded for homes
Option C is wrong because the cost approach is not excluded for homes. It can be applied to residential property and is often especially useful for new construction.
New build, cost counts
When improvements are new and land and cost data are plentiful, the cost approach can carry real weight.
How to use: Use this when a question pairs new construction with strong land and cost data.
Exam Tip
Facts about land values, construction costs and entrepreneurial profit usually point to the cost approach. Watch for options that switch the conclusion to a different approach.
Common Mistakes to Avoid
- -Believing the cost approach cannot be used for single-family homes
- -Ignoring entrepreneurial profit when developing the cost approach
- -Assuming strong cost data reduce the weight given to the cost approach
Concept Deep Dive
Analysis
This question tests when the cost approach becomes persuasive in reconciliation. New construction minimizes depreciation, and abundant data on land values and development costs, including market-derived entrepreneurial profit, strengthen the cost indication. The answer should recognize that such data can support significant reliance on cost.
Background Knowledge
The cost approach estimates land value plus the cost of the improvements, less depreciation, and includes entrepreneurial incentive where the market supports it. It tends to be most reliable for new or nearly new improvements, where depreciation is small. Market-derived profit data help the cost figure reflect what buyers actually pay.
Real-World Application
An appraiser values a just-completed home in a subdivision where the builder and competitors have sold many similar lots and homes. With documented lot prices, construction costs and builder profit margins from recent projects, the appraiser gives the cost approach significant weight alongside sales comparison.
More Reconciliation Questions
In a cost approach for an improved property, an appraiser estimates site value by sales comparison, allocation and extraction, then settles on one site-value figure before final reconciliation. How is this step best described?
An extraordinary assumption was reasonably supported, properly used and disclosed in an appraisal report. Later, the assumed information is found to be false. Which conclusion is best supported?
An otherwise applicable valuation approach cannot be developed reliably from the available data. The remaining scope can produce credible assignment results. What should the appraiser do?
May an appraiser use a hypothetical condition in any assignment?
An appraisal has a current effective date and permits an extraordinary assumption if its requirements are met. Which situation involves uncertain information rather than a fact known to be contrary to reality on that date?
Why must a report identify any real property interest that is being excluded from the value opinion?
Which review best helps explain divergent cost, sales-comparison and income indications?
Two value indications are $340,000 and $392,000. What is the difference as a percentage of the lower indication, rounded to one decimal place?
An unauthorized third party requests a lender-client’s report. No due-process or other permitted disclosure exception applies. How should the appraiser respond?
An appraiser proposes to assume there are no hidden defects. Which fact would characterize that assumption as extraordinary under the USPAP 2024 definition, rather than justify dismissing it as routine boilerplate?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
Three comparables are equally verified and their adjustments are equally well supported, so the appraiser ranks them by gross adjustment as a percentage of sale price, smallest first. Comparable 1 sold for $350,000 with adjustments of +$10,500 and -$7,000. Comparable 2 sold for $340,000 with +$20,400 and -$18,700. Comparable 3 sold for $500,000 with a single -$22,000 adjustment. What is the ranking?
Next Question
A reconciliation section that merely restates the three indications and announces the final value: