When is the cost approach typically given the greatest weight in reconciliation?
Correct Answer
A) Special-use properties and new construction with scant sales
Why this is correct: The cost approach is most reliable when the improvement is new (minimizing depreciation estimation error) and for special-use properties with no active market sales (e.g., churches, schools). In these cases, the sales comparison and income approaches may be less applicable or reliable. Why the other choices are wrong: "Sixty-year-old cottages located in dense, active markets" is incorrect; here, ample sales data makes the sales comparison approach primary, and estimating depreciation for an old building is difficult. "For condominium units in active towers" is incorrect; the sales comparison approach is typically primary. "Whenever it produces the highest figure" is incorrect; the approach's weight is based on reliability, not the resulting value. Exam tip: Cost approach gets weight when sales are scarce and the building is new or special-purpose.
Why This Is the Correct Answer
The cost approach is strongest where depreciation is minimal and comparable sales are scarce, which describes new construction and special-purpose properties.
Why the Other Options Are Wrong
Option B: Sixty-year-old cottages located in dense, active markets
A sixty-year-old cottage in an active market has both large depreciation and abundant sales, favouring sales comparison instead.
Option C: For condominium units in active towers
Condominium units in active towers have frequent resales, which makes sales comparison the strongest approach.
Option D: Whenever it produces the highest figure
Weighting an approach because it produces a higher figure is advocacy rather than analysis.
New or Nothing Else Sells
New or Nothing Else Sells. Little depreciation to estimate, or no sales to compare against.
How to use: Weight by the reliability of each approach's inputs for this property, and explain the reasoning in reconciliation.
Exam Tip
Insurance and some public assignments call for the cost approach regardless of weighting, since replacement cost is the question being asked.
Common Mistakes to Avoid
- -Weighting an approach by the figure it produces
- -Developing the cost approach without weighting it appropriately
- -Overlooking special-purpose properties as the approach's strongest application
Concept Deep Dive
Analysis
The cost approach carries the most weight where its two hardest inputs are least problematic and where the alternatives are weakest. New construction satisfies the first condition: depreciation is minimal, so the deduction that usually undermines the approach barely matters, and cost figures are current and verifiable. Special-purpose properties satisfy the second: a church, a school, a fire station or a purpose-built industrial facility trades so rarely that comparable sales barely exist and produces no market rent to capitalize, leaving cost as the only approach with real support. The two conditions often appear together in new special-purpose construction, where the cost approach may be the only credible indication. By contrast, the approach carries least weight where sales are abundant and depreciation is large — an older cottage in an active market or a condominium in a tower with regular resales, both of which the distractors describe. And no approach is ever weighted for producing a particular figure.
Background Knowledge
The cost approach is most reliable on new construction, where depreciation is minimal, and on special-purpose properties, where comparable sales and rental data are scarce. Reconciliation weights approaches by the quality of supporting evidence.
Real-World Application
An appraiser valuing a newly built fire station relies principally on the cost approach, noting the absence of comparable sales and minimal depreciation.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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