A property appraiser is using the cost approach and determines that a building would cost $400,000 to rebuild today, but estimates $80,000 in depreciation. If the land value is $200,000, what is the indicated value using this approach?

Q: What is the correct answer to: A property appraiser is using the cost approach and determines that a building would cost $400,000 to rebuild today, but estimates $80,000 in depreciation. If the land value is $200,000, what is the indicated value using this approach?

The correct answer is $520,000. The cost approach formula is Land Value + (Replacement Cost New - Depreciation) = Property Value. Here: $200,000 (land) + ($400,000 - $80,000) = $200,000 + $320,000 = $520,000. This approach estimates value by determining what it would cost to replace the property today, minus any loss in value due to depreciation, plus the land value.

Q: What background knowledge is needed for this Property Valuation question?

The cost approach is one of three primary valuation methods recognized in Canadian real estate appraisal, alongside the direct comparison (sales) approach and income approach. Under provincial regulations and appraisal standards, this method estimates property value by determining what it would cost to replace the improvements, then adjusting for depreciation. Depreciation includes physical deterioration, functional obsolescence, and economic obsolescence. The approach assumes land doesn't depreciate and calculates separately. This method is particularly valuable for unique properties, new construction, or when comparable sales are limited. Canadian appraisal standards require consideration of all three approaches when applicable, with the cost approach being especially relevant for insurance valuations and property tax assessments.

Q: What is a good way to remember the answer to this Property Valuation question?

Remember 'LAND + BUILD - DECAY': Land value + Building replacement cost - Depreciation = Total property value using cost approach. When you see cost approach questions, immediately think 'LCD' and set up the formula: Land Value + (Construction/Replacement Cost - Depreciation). This ensures you don't forget any component or apply depreciation incorrectly to the land portion.

Q: What exam tip applies to this Property Valuation question?

Always use the complete cost approach formula: Land Value + (Replacement Cost New - Total Depreciation). Don't forget any component.

Q: How does this Property Valuation concept apply in real world practice?

A real estate agent is helping a client evaluate a custom-built home in a rural area where comparable sales are rare. The client wants to know if the $650,000 asking price is reasonable. An appraiser determines the land is worth $150,000, the home would cost $550,000 to rebuild today, but shows $75,000 in depreciation due to some outdated fixtures and minor wear. Using the cost approach: $150,000 + ($550,000 - $75,000) = $625,000, suggesting the asking price may be slightly high and providing negotiation leverage.

Question

Property ValuationCost ApproachONMEDIUM

A property appraiser is using the cost approach and determines that a building would cost $400,000 to rebuild today, but estimates $80,000 in depreciation. If the land value is $200,000, what is the indicated value using this approach?

Answer Options

A

$520,000

B

$600,000

C

$480,000

D

$320,000