On the specified Fannie Mae Form 1004 cost section, what does the indicated-value calculation address?
Correct Answer
D) Site value plus supported improvement cost new less applicable depreciation.
The stated Form 1004 cost section presents a cost-based indication including site value and depreciated improvement cost. It is not an assessment or loan-ratio calculation. Whether cost development is necessary or a specific program requires it depends on the actual assignment; a blanket requirement is not inferred.
Why This Is the Correct Answer
Option D is correct because the indicated value in the cost section is site value plus supported improvement cost new less applicable depreciation. This follows the cost approach steps of estimating cost new and then the difference between cost new and present worth, which is depreciation.
Why the Other Options Are Wrong
Option A: Verification of the purchase price by copying the contract terms into the cost section.
Option A says the calculation verifies the purchase price by copying contract terms into the cost section. Contract analysis is a separate task, and the cost section builds value from site, cost new and depreciation rather than from the contract.
Option B: The state tax assessor’s assessment result for the property.
Option B describes the state tax assessor's assessment result. An assessment is a separate government determination and is not the cost-based indication developed in the appraisal.
Option C: The loan amount divided by the indicated value.
Option C, the loan amount divided by the indicated value, is a loan-to-value ratio. That is a lending measure, not part of the cost approach indication.
Site plus depreciated cost
The cost section answers one question: site plus depreciated building cost. Nothing about loans, taxes or contracts.
How to use: Use site plus depreciated cost to rule out choices drawn from other parts of a transaction.
Exam Tip
When a question asks what the cost section calculates, pick the answer that combines site value, cost new and depreciation. Ratios and assessments are distractors.
Common Mistakes to Avoid
- -Confusing the cost indication with a tax assessment
- -Treating loan-to-value as part of the cost approach
- -Assuming the cost approach is required on every assignment
Concept Deep Dive
Analysis
This question tests what the cost section of the specified Form 1004 is designed to show. The cost approach indication combines site value with the cost new of the improvements less depreciation. Other items such as contract terms, assessments and loan ratios belong elsewhere or outside the appraisal's cost analysis.
Background Knowledge
When the cost approach is developed, the appraiser estimates site value, estimates cost new of the improvements, and estimates depreciation as the difference between cost new and present worth. The cost indication combines these figures. Whether the cost approach is needed depends on the scope of work for the specific assignment.
Real-World Application
An appraiser completing a residential report fills in the cost section with a site value from land sales, a cost new from a cost service and her depreciation estimate. The lender separately computes the loan-to-value ratio using the final reconciled value.
More Cost Approach Questions
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