Which stated scenario best supports substantial cost-approach reliability?
Correct Answer
A) A suitable new improvement with verified site, cost and minimal supported depreciation uncertainty.
A new improvement can provide strong cost evidence when its site, cost and all depreciation inputs are reliable. Custom construction can still have functional or external loss, so newness does not guarantee negligible depreciation or value equal to expenditure. Compare actual evidentiary support.
Why This Is the Correct Answer
Option A is correct because the cost approach is most reliable for a relatively new property with little depreciation. A suitable new improvement with verified site value, verified cost and minimal depreciation uncertainty gives the approach strong inputs.
Why the Other Options Are Wrong
Option B: An older property, because its construction invoice is large.
Option B, an older property because its construction invoice is large, is wrong because a large invoice does not make the approach reliable. Older properties usually have more depreciation to estimate, which reduces reliability, and historical cost is not the same as current cost or value.
Option C: A condominium, because cost gives the highest value.
Option C, a condominium because cost gives the highest value, is wrong because reliability depends on the quality of the inputs, not on which approach produces the highest number. Choosing an approach because it gives a high value is not sound reasoning.
Option D: A renovated farmhouse with large, unsupported depreciation inputs and an uncertain cost estimate.
Option D, a renovated farmhouse with large, unsupported depreciation inputs and an uncertain cost estimate, is wrong because unsupported depreciation and uncertain costs weaken the cost approach. This is the opposite of the conditions that make it reliable.
New and known works best
The cost approach is strongest when the building is new and the land value, costs and depreciation are all well known.
How to use: Use this to judge which scenario best supports relying on the cost approach.
Exam Tip
Pick the scenario with the best-supported inputs and the least depreciation. Choices that justify an approach by a high value or a big invoice are not about reliability.
Common Mistakes to Avoid
- -Assuming a high historical cost makes the cost approach reliable
- -Choosing an approach because it produces the highest value
- -Assuming a new building has no functional or external loss
Concept Deep Dive
Analysis
This question tests when the cost approach is most reliable. The approach works best when the improvement is relatively new, the site value and costs are well supported, and depreciation is small and easy to measure. The answer is the scenario with verified inputs and little depreciation uncertainty.
Background Knowledge
The cost approach estimates value as site value plus depreciated cost of improvements. Its reliability rests on supported site value, accurate current costs and measurable depreciation, which is why it tends to be strongest for new or nearly new improvements.
Real-World Application
An appraiser valuing a newly built house with a verified builder cost breakdown and recent lot sales gives the cost approach considerable weight. For a 70-year-old remodeled farmhouse with hard-to-measure depreciation, the same appraiser relies more on sales comparison.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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Previous Question
Correcting a deficiency in the improvements by retrofit would cost $14,000 today and is economically justified. The current cost new of the improvements already includes $9,000, at current prices, for the equivalent item installed during new construction. What amount should be deducted for the deficiency so that the cost is not counted twice?
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