The cost approach is generally the least reliable of the three approaches for valuing a building constructed in the 1930s. The main reason is:
Correct Answer
A) the difficulty of estimating accrued depreciation
The cost approach values a property as site value plus the cost to build the improvements new, minus accrued depreciation. The depreciation deduction is the weak link: after nine decades of physical deterioration plus functional and external obsolescence, it can only be estimated, and a modest percentage error applied to a large reproduction cost swings the result badly. That is why the approach is most dependable on new construction, where accrued depreciation is close to zero.
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Related Topics & Key Terms
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Related Concepts
Reconciliation is the final step in the appraisal process where the appraiser analyzes the value indications from all applicable approaches and arrives at a single final opinion of value. It is not a simple average of the three values.
The comparable sales approach estimates a property's value by comparing it to similar properties that have recently sold in the same market area. It is the most widely used and reliable approach for appraising residential properties.
The cost approach estimates a property's value by calculating the current cost to rebuild the improvements, subtracting accumulated depreciation, and adding the land value. It is most reliable for new construction and special-purpose properties.
More Valuation Market Analysis Questions
The best method to determine fair market value is:
A luxury condominium in Manhattan is being appraised for a buyer who will be subject to the mansion tax. The purchase price is $1.2 million. When preparing the market analysis, which statement about the mansion tax impact is correct?
When commercial office demand and supply decline equally:
The main real estate market participants include:
An appraiser is using the income approach to value a 12-unit rental building in Brooklyn. The building generates $180,000 in annual gross rental income. Operating expenses total $54,000 annually. The appraiser determines that a 7.5% capitalization rate is appropriate for this type of property in this location. What is the indicated value using the income approach?
- → A first-time buyer in New York City asks their agent about the difference between owning a co-op versus a condo. What is the fundamental ownership difference the agent should explain?
- → An example of functional obsolescence is:
- → A lender receives a BPO from a broker. All of the following are acceptable uses of a BPO EXCEPT.
- → A lender assigns an appraiser who has never worked in the subject market and does not have access to local data sources. The lender says the appraiser can learn as they go because the fee is low and the turn time is fast. For a Fannie Mae mortgage assignment, what is the best response?
- → A parcel is in a desirable retail corridor and buyers want it, but an unresolved title defect and missing legal access make it hard to close. Which element of value is most directly impaired?
- → An appraiser has been asked to provide a restricted appraisal report instead of an appraisal report for a lending assignment. Under USPAP, what is the key difference between these two report options?
- → Who typically hires the appraiser in a real estate transaction?
- → An appraiser valuing a newly built warehouse with no rental history uses the cost approach as the primary valuation method. Why is the cost approach often most relevant for new or special-purpose properties?
- → For appraising a vacant lot for single-family residence construction, which approach applies?
- → What does the term 'reconciliation' mean in the context of a real estate appraisal?
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