For an older house, verified current sales support $430,000 while cost indicates $520,000. Current cost-new and site-value inputs have been verified. Which remaining cost input should be examined for possible overstatement of the indication?
Correct Answer
C) Accrued depreciation may have been underestimated.
With cost new and site value verified, insufficient accrued depreciation can overstate the cost indication because depreciation is deducted from cost new. This identifies an input to investigate; the numerical difference alone would not establish that depreciation is wrong.
Why This Is the Correct Answer
Option C is correct because depreciation is subtracted from cost new, so too little accrued depreciation leaves the cost indication too high. With cost new and site value verified, an underestimate of depreciation could explain why the cost approach shows $520,000 against $430,000 from verified sales. This identifies an input to investigate; the difference alone does not prove depreciation is wrong.
Why the Other Options Are Wrong
Option A: Accrued depreciation must have been overestimated.
Option A, that accrued depreciation must have been overestimated, is wrong for two reasons: overestimating depreciation would lower the cost indication rather than raise it, and the word must overstates what the evidence shows.
Option B: The cost approach must be correct because it is higher.
Option B, that the cost approach must be correct because it is higher, is wrong because a higher indication is not a more reliable one. Verified sales at $430,000 suggest the cost figure needs review.
Option D: The sales approach must be discarded because the house is old.
Option D, that the sales approach must be discarded because the house is old, is wrong because the sales are verified and current. A property's age does not make sales evidence unusable; for older homes, depreciation is often harder to estimate than sales are to find.
Too little depreciation, too high
Because depreciation is subtracted, underestimating it pushes the cost approach value up.
How to use: Use this when a cost approach indication on an older property is higher than the market evidence.
Exam Tip
Work through the formula: site plus cost new minus depreciation. Watch for answers that reverse the direction of the error or use words like must without support.
Common Mistakes to Avoid
- -Reversing the effect of depreciation errors on the cost indication
- -Assuming the higher indication is correct
- -Discarding verified sales because the property is old
Concept Deep Dive
Analysis
This question tests your understanding of the cost approach formula and how an input error affects the result. The cost approach adds site value to cost new minus accrued depreciation. If cost new and site value are verified and the cost indication is still too high, underestimated depreciation is the input to investigate.
Background Knowledge
In the cost approach, value equals site value plus the cost new of improvements minus accrued depreciation from physical deterioration, functional obsolescence and external obsolescence. Depreciation is often the hardest input to support for older buildings, so the depreciation estimate deserves review for market support.
Real-World Application
An appraiser valuing a 60-year-old home sees the cost approach well above several verified recent sales. After confirming the site value and cost manual figures, the appraiser revisits the depreciation estimate and finds functional obsolescence from an outdated floor plan was not fully captured.
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?
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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?
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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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