What is the primary limitation of the cost approach when valuing older residential properties?
Correct Answer
D) It may not capture functional or economic obsolescence
The cost approach calculates replacement cost new minus depreciation, but it can be difficult to accurately quantify functional obsolescence (outdated design) and economic obsolescence (external factors) in older properties, making it less reliable than market-based approaches.
Why This Is the Correct Answer
The cost approach's primary limitation with older properties is its difficulty in accurately measuring functional and economic obsolescence. Functional obsolescence includes outdated layouts, systems, or designs that reduce property value. Economic obsolescence involves external factors like neighborhood decline or changing market conditions. While the cost approach can calculate replacement cost and physical depreciation, quantifying these forms of obsolescence is subjective and challenging, making the approach less reliable for older properties compared to market or income approaches.
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