A newly completed 4,800-square-foot house sits in a neighborhood of 1,800-square-foot homes. Its cost approach, with little physical depreciation charged, indicates $610,000; well-verified sales of the most similar houses support $540,000. How should the indications be weighed?
Correct Answer
D) Favor sales comparison, as an overimproved house is not a proper improvement.
The cost approach earns extra weight for new construction when the property is a new and proper improvement. A house far larger than its neighbors is an overimprovement that suffers obsolescence the cost approach has not charged, so the verified sales deserve more weight. Minimal physical depreciation does not make cost reliable here, averaging substitutes arithmetic for analysis, and the sales already reflect what buyers pay in this market.
Why This Is the Correct Answer
Option D is correct because the cost approach deserves extra weight for new construction only when the property is a new and proper improvement. This house is overimproved for its neighborhood, so its cost includes value the market does not recognize, and the well-verified sales are the better measure of market value.
Why the Other Options Are Wrong
Option A: Favor the cost indication, because a new house carries minimal depreciation.
Option A favors cost because a new house carries minimal depreciation. Physical depreciation may be minimal, but an overimprovement still suffers obsolescence, which the cost approach here did not charge.
Option B: Average the two, since each indication rests on verified data.
Option B averages the two indications because both rest on verified data. Averaging replaces analysis with arithmetic and ignores the fact that the cost indication omits the overimprovement's loss in value.
Option C: Favor the cost indication, since sales cannot reflect a house this large.
Option C favors cost because sales cannot reflect a house this large. The sales of the most similar houses show what buyers in this neighborhood will pay, which is exactly the evidence needed to measure the overimprovement.
New is not always proper
Cost wins for new construction only when the building fits its site and market. A new overimprovement loses value the day it is finished.
How to use: Use this check when a new-construction question shows cost well above the sales evidence.
Exam Tip
When a new building is much larger or costlier than its neighbors, expect obsolescence and do not give the cost approach extra weight just because the house is new.
Common Mistakes to Avoid
- -Giving cost heavy weight on any new building without checking whether it is a proper improvement
- -Counting only physical depreciation and ignoring obsolescence
- -Averaging indications that differ for an identifiable reason
Concept Deep Dive
Analysis
The question tests the limit on the rule that new construction favors the cost approach. That rule assumes a new and proper improvement; an oversized house in a modest neighborhood is an overimprovement whose cost exceeds what the market will pay. The candidate must notice that the cost approach charged little depreciation and so missed the obsolescence that the sales reveal.
Background Knowledge
Under the principle of conformity, a property far out of character with its surroundings tends to be worth less than its cost. The cost approach is most reliable for new construction that is a proper improvement, where cost and value tend to align and depreciation is small.
Real-World Application
An owner builds a large custom house in a neighborhood of small ranch homes and is surprised when the appraisal comes in well below construction cost. The appraiser explains that buyers in that location will not pay for the extra size, so sales comparison received most weight.
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?
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