A cost approach is necessary for credible assignment results. What does SR 1-4(b) require as part of that approach?
Correct Answer
A) Develop a site value opinion by an appropriate method
When a cost approach is necessary, SR 1-4(b) requires site-value analysis by an appropriate method, analysis of available cost data, and analysis of available depreciation data. This is not a universal command to allocate a separate site value in every real-property assignment regardless of approach. SR 1-4(a) concerns sales comparison, while SR 1-2(e) addresses relevant property identification.
Why This Is the Correct Answer
Option A is correct because SR 1-4(b)(i) requires the appraiser, when a cost approach is necessary for credible results, to develop an opinion of site value by an appropriate appraisal method or technique. The rule also requires analysis of available cost data and depreciation data. Site value is a building block of the cost approach.
Why the Other Options Are Wrong
Option B: Omit site value whenever improvements exist on the site
Option B, omitting site value whenever improvements exist, contradicts the rule. The cost approach is used for improved properties, and site value is developed separately and added to the depreciated cost of the improvements.
Option C: Use the client’s desired land allocation without analysis
Option C, using the client's desired land allocation without analysis, is wrong because site value must be developed by an appropriate method, and adopting a client's preferred figure without analysis undermines credibility and impartiality.
Option D: Require a ten-year income projection in place of cost analysis
Option D, requiring a ten-year income projection in place of cost analysis, confuses approaches. Income projections belong to the income approach; SR 1-4(b) calls for site value, cost data and depreciation analysis.
Land plus building minus wear
Cost approach equals land value plus building cost new minus depreciation. SR 1-4(b) asks for each piece.
How to use: Use this formula to check what a cost-approach question expects the appraiser to develop.
Exam Tip
If a cost-approach answer skips site value or swaps in income analysis, compare it against the three SR 1-4(b) components.
Common Mistakes to Avoid
- -Skipping site value because the site is improved
- -Accepting a client's land allocation without support
- -Mixing income-approach projections into the cost approach
Concept Deep Dive
Analysis
This question tests the development requirements for the cost approach under SR 1-4(b). When a cost approach is necessary, the appraiser must develop an opinion of site value by an appropriate method, and analyze cost and depreciation data. Recognizing site value as the first listed requirement leads to the answer.
Background Knowledge
The cost approach estimates value as site value plus the cost new of the improvements less depreciation. SR 1-4(b) requires, when this approach is necessary, developing site value by an appropriate method, analyzing comparable cost data, and analyzing depreciation. It is not a universal command to allocate site value in all assignments regardless of the approaches used.
Real-World Application
An appraiser values a newer custom home where the cost approach is needed for credible results. She develops site value from recent vacant lot sales, estimates replacement cost from a cost service, and deducts depreciation.
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