Florida Real Estate Broker ExaminationValuation and Market AnalysisHard
An appraiser is tasked with valuing a newly constructed, highly specialized manufacturing plant. There are no comparable sales of similar facilities in the region, and the property does not generate income directly from rent. Which appraisal approach would be most appropriate for this valuation?
- ASales Comparison Approach
- BCost-Depreciation Approach
- CIncome Capitalization Approach
- DGross Income Multiplier Approach
Show answer & explanationAnswer & explanation
Correct answer: B. Cost-Depreciation Approach
The Cost-Depreciation Approach is most appropriate for new or unique properties where comparable sales are scarce and the property does not typically generate rental income. It involves estimating the cost to construct a new building, then subtracting depreciation.
Why the other options are wrong
- A. Lack of comparable sales makes this approach unreliable.
- C. The property does not generate rental income, making this approach inappropriate.
- D. The Gross Income Multiplier is a form of the income approach and is not suitable for properties without rental income.
Cost-Depreciation Approach (Specialized Property)
The Cost-Depreciation Approach is particularly suitable for valuing new construction, unique properties, or properties where sales comparables and income data are limited or non-existent.
- Estimates the cost to replace or reproduce the improvements.
- Subtracts accrued depreciation (physical, functional, external).
- Adds the estimated land value to arrive at the total property value.
Memory trick: Cost: 'C' for Construction, 'C' for Complex.