Certified Residential Appraiser Practice Exam

What does the Cost Approach primarily estimate?

1. The current market value of a property

2. The value of the land and any structures combined

3. The current cost to replace the structure minus depreciation

4. The revenue the property can generate

The correct answer is: The current cost to replace the structure minus depreciation

The Cost Approach primarily estimates the current cost to replace the structure minus depreciation because this method is grounded in the principle of substitution. It posits that a rational buyer would not pay more for a property than the cost to construct a similar one, adjusted for any physical depreciation, functional obsolescence, or external economic factors that may reduce value. This approach is particularly useful in situations where there are not enough comparable sales to determine market value directly, such as unique or newer properties. By determining the replacement cost and taking into account any depreciation, the appraiser can arrive at a realistic estimate of the value of the property based on current construction costs and the condition of the existing structures. Understanding the current cost to replace the structure while accounting for depreciation provides a more accurate reflection of the property's worth at a specific point in time, which is why this answer is the most appropriate.