Certified Residential Appraiser Practice Exam

Which approach to valuation is NOT typically used for determining land value?

1. Sales Approach

2. Income Approach

3. Cost Approach

4. Allocation Approach

The correct answer is: Cost Approach

The cost approach is primarily used for valuing improvements rather than the land itself. This approach involves estimating the current cost to replace or reproduce the improvements on the property, then subtracting any depreciation to arrive at a total value. While this approach considers the value of the land indirectly (as it is factored into the calculation for the total property), it does not directly estimate the value of the land alone. In contrast, the sales approach involves comparing recent sales of similar properties to determine land values based on what buyers have recently paid in the market. The income approach assesses the potential income generation of the property, making it relevant for investment properties, where the land's value is derived from its ability to produce income. The allocation approach divides the total property value into specific values for land and improvements based on a percentage derived from similar property sales, directly addressing land value. Thus, the cost approach is less applicable for determining land value on its own, focusing instead on the overall property value inclusive of improvements.