Real Estate Appraisal Practice Exam

The cost approach to appraisal primarily measures what?

1. The cost to acquire land and construct a reproduction

2. The income potential of the property

3. The market value of surrounding properties

4. The physical characteristics of the building

The correct answer is: The cost to acquire land and construct a reproduction

The cost approach to appraisal is fundamentally based on the principle of substitution, which asserts that a buyer will not pay more for a property than it would cost to construct a replica of the same property, assuming no issues exist with the land or market conditions. This approach primarily focuses on determining the value by estimating the cost to acquire the land and the cost to construct a reproduction of the improvements (buildings and other structures) on that land. By evaluating both the value of the land and the construction costs, appraisers can arrive at a comprehensive estimate of the value of the property. This method is particularly useful for new constructions or properties with little to no comparable market data, as it relies on tangible cost metrics rather than fluctuating market dynamics. The other options address different aspects of property valuation that do not specifically relate to the cost approach. While the income potential of the property is evaluated in the income approach, and the market value of surrounding properties is determined through the sales comparison approach, neither of these methods aligns with the focus of the cost approach. Additionally, the physical characteristics of the building are considered within the context of estimating costs but do not reflect the core calculation in the cost approach itself. The main intent is always to determine how much it would cost to