California Real Estate Broker ExaminationValuation and AppraisalMedium
A buyer is considering purchasing a unique, historic mansion that has no direct comparable sales in the area and would be cost-prohibitive to replace. Which valuation approach would an appraiser most likely rely on to estimate the property's value?
- ACost Approach
- BIncome Approach
- CSales Comparison Approach
- DGross Rent Multiplier (GRM)
Show answer & explanationAnswer & explanation
Correct answer: A. Cost Approach
The cost approach is often used for unique properties, new construction, or properties where income or comparable sales data is scarce. It estimates value based on the cost to replace the structure, minus depreciation, plus land value.
Why the other options are wrong
- B. Unsuitable as mansions are typically owner-occupied, not income-producing.
- C. Unsuitable due to 'no direct comparable sales'.
- D. GRM is a simplified income approach, unsuitable for non-income properties and lacks detail for unique properties.
Cost Approach
The cost approach estimates property value by calculating the cost to replace the improvements, subtracting depreciation, and adding the land value.
- Best for new construction, unique properties (e.g., schools, churches), or properties with no income/sales data.
- Steps involve estimating land value, cost of new construction, and accrued depreciation.
- Depreciation considers physical deterioration, functional obsolescence, and external obsolescence.
Memory trick: CIS: Comparables, Income, Structure's cost are the ways to value.