In an Appraisal Report for a 30-year-old residential property, the appraiser did not develop the cost approach. What should the report do?
Correct Answer
A) State the reason for excluding the cost approach
Standards Rule 2-2(a) requires an Appraisal Report to summarize procedures and state the reason for excluding a sales comparison, cost or income approach that was not developed. The reason should fit the assignment; the property’s age alone does not make the cost approach universally inapplicable.
Why This Is the Correct Answer
Option A is correct because Standards Rule 2-2(a) requires an Appraisal Report to state the reasons for excluding the sales comparison, cost or income approach if any have not been developed. Since the cost approach was not developed, the report should explain why. The explanation should fit the specific assignment.
Why the Other Options Are Wrong
Option B: Include a brief cost approach calculation anyway
Option B, including a brief cost approach calculation anyway, does not satisfy the requirement; if the approach was not developed, the report states the reason for excluding it rather than adding a token calculation.
Option C: State that the cost approach does not apply to residential property
Option C, stating that the cost approach does not apply to residential property, is a false blanket claim; the cost approach can apply to residential property, and age alone does not make it inapplicable.
Option D: Omit any reference to the excluded approach
Option D, omitting any reference to the excluded approach, is wrong because SR 2-2(a) requires the reason for exclusion to be stated.
Skip it, say why
If you skip an approach, the Appraisal Report must say why.
How to use: Use skip-it-say-why whenever a question describes an approach that was not developed.
Exam Tip
Look for the answer that requires stating a reason for the exclusion, not one that hides the omission or makes a blanket rule.
Common Mistakes to Avoid
- -Leaving out any mention of an approach that was not developed
- -Claiming the cost approach never applies to residential property
- -Adding a token calculation instead of explaining the exclusion
Concept Deep Dive
Analysis
This question tests the reporting requirement when an approach to value is not developed. An Appraisal Report must state the reasons for excluding any of the three approaches that were not developed. The reason must fit the assignment, not a blanket claim based on property type or age.
Background Knowledge
USPAP requires transparency about which approaches were used and why others were not. In an Appraisal Report, the appraiser summarizes the procedures followed and states the reasons for excluding any approach. For older homes, reasons may include difficulty estimating depreciation reliably, but the reason must match the facts.
Real-World Application
For a 30-year-old house in an active subdivision, an appraiser relies on sales comparison. Her report states that the cost approach was not developed because depreciation would be difficult to estimate reliably and buyers in this market rely on comparable sales.
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