When the cost approach is necessary for credible results, what analysis is required by SR 1-4(b)?
Correct Answer
B) Appropriate site value, improvement cost new and evidence-supported depreciation
When the cost approach is necessary, develop site value with an appropriate method, analyze available comparable cost data for cost new, and analyze available evidence of the difference between cost new and present improvement worth. A restricted report does not waive that development.
Why This Is the Correct Answer
Option B is correct because SR 1-4(b) requires the appraiser to develop site value by an appropriate method, analyze comparable cost data to estimate cost new of the improvements, and analyze comparable data to estimate depreciation. Those three elements form the cost approach, and a restricted report does not waive this development.
Why the Other Options Are Wrong
Option A: Sales-comparison prices of similar properties in place of cost data
Option A substitutes sales-comparison prices for cost data, which is a different approach altogether. When the cost approach is necessary, the appraiser must analyze cost data and depreciation rather than replace them with sale prices.
Option C: Original construction invoices without current-cost or depreciation analysis
Option C relies on original construction invoices without current-cost or depreciation analysis. SR 1-4(b) calls for analysis of comparable cost data to estimate cost new and of evidence to estimate depreciation, which historical invoices alone do not provide.
Option D: A confidentiality statement in place of an opinion of site value
Option D offers a confidentiality statement in place of site value, which has nothing to do with cost approach development. Site value must be developed by an appropriate method when the cost approach is necessary.
Land plus cost minus depreciation
Cost approach equals site value plus cost new of improvements minus depreciation; SR 1-4(b) asks you to develop each piece.
How to use: Use this formula to check whether a cost approach answer includes all three required elements.
Exam Tip
For cost approach questions, choose the answer that covers site value, current cost new and supported depreciation together.
Common Mistakes to Avoid
- -Using the original construction cost instead of current cost new
- -Omitting depreciation for a relatively new building
- -Skipping site value when the cost approach is developed
Concept Deep Dive
Analysis
This question tests the development steps in Standards Rule 1-4(b) when the cost approach is necessary for credible results. The rule has three parts: site value, cost new of the improvements, and depreciation. Pick the option that names all three, supported by appropriate evidence.
Background Knowledge
The cost approach estimates value as site value plus the cost new of improvements less depreciation. Depreciation is the difference between cost new and the present worth of the improvements and can arise from physical, functional or external causes.
Real-World Application
An appraiser values a five-year-old custom home where few comparable sales exist. She estimates site value from land sales, prices the home's current replacement cost from cost data, and deducts depreciation supported by the home's age and condition.
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