An appraiser gives the cost approach little weight on a sixty-year-old house. What is the most defensible reason?
Correct Answer
C) Accrued depreciation cannot be measured reliably
Why this is correct: For a sixty-year-old house, accrued depreciation (physical, functional, external) is often large and difficult to measure precisely. This uncertainty makes the cost approach less reliable, justifying giving it little weight. Why the other choices are wrong: The cost approach may not be used on older homes is false; it can be developed but may be unreliable. The client asked that it be left out is not a defensible analytical reason; the appraiser must justify scope decisions. Cost figures are unavailable for older construction is generally untrue; cost services provide historical cost data. Exam tip: The cost approach weakens with age due to depreciation estimation difficulty.
Why This Is the Correct Answer
Accrued depreciation on a sixty-year-old building is large and hard to measure reliably, so an error in that deduction produces a correspondingly large error in the indication.
Why the Other Options Are Wrong
Option A: The cost approach may not be used on older homes
The cost approach is not prohibited on older properties. Its weight depends on reliability, not on a rule.
Option B: The client asked that it be left out of the report
Client preference is not a basis for weighting an approach. Scope of work follows what credible results require.
Option D: Cost figures are unavailable for older construction
Cost figures for older construction are obtainable through cost services and adjustment. Availability is not the limitation.
The Older It Is, the Bigger the Guess
The Older It Is, the Bigger the Guess. Depreciation is the weak link and age makes it heavier.
How to use: Weight approaches by reliability, and explain the reasoning in reconciliation rather than merely stating the weight.
Exam Tip
The cost approach retains value on unique or special-purpose properties where comparable sales are scarce, whatever the building's age.
Common Mistakes to Avoid
- -Stating a weighting without explaining the reasoning
- -Treating the approach as prohibited on older properties
- -Attributing the weakness to cost data availability
Concept Deep Dive
Analysis
The cost approach works by estimating cost new, deducting accrued depreciation, and adding land value. Its reliability therefore rests on the depreciation estimate, and that estimate becomes progressively harder as a building ages. On a new house depreciation is minimal and any error is small. On a sixty-year-old house depreciation may be half the cost new or more, it includes physical deterioration both curable and incurable, functional obsolescence from layouts and systems that no longer match expectations, and possibly external obsolescence — and each component must be measured from market evidence that is often thin. An error in a large deduction produces a large error in the indication, which is why the approach is given less weight when good sales evidence is available. The distractors offer reasons that are not true: the approach is not prohibited on older homes, a client's preference is not a basis for weighting, and cost figures for older construction are obtainable through cost services and adjustment.
Background Knowledge
The cost approach estimates cost new less accrued depreciation plus land value. Its reliability declines with age as depreciation grows larger and harder to measure across physical, functional and external components.
Real-World Application
An appraiser gives the cost approach minimal weight on a 1962 house, explaining that depreciation exceeds half of cost new and cannot be measured reliably against available evidence.
More Reconciliation Questions
Reconciliation of the approaches to value is best described as which activity?
Why should the reconciliation address the quantity of evidence as well as its quality?
How long must a report be retained compared with the workfile?
What distinguishes an appraisal review from an appraisal?
An appraiser reconciles to a value at the top of the indicated range because the client needs that figure. What has occurred?
What does it mean that a value opinion must be reasonable rather than merely arithmetically derived?
What should the reconciliation section explain to the reader?
How do the content obligations of the two report options differ with respect to the information analyzed?
The three approaches indicate $480,000, $495,000 and $610,000. What should the appraiser do first?
Three approaches indicate $1.02 million, $1.05 million and $1.04 million. How should this be reported?
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