California Real Estate Broker ExaminationValuation and AppraisalMedium
An appraiser is tasked with valuing a specialized industrial facility that was custom-built for a specific manufacturing process. There are very few comparable sales in the market, and the property generates no direct rental income. Which appraisal approach would likely be given the most weight in determining its value?
- ASales Comparison Approach
- BIncome Approach
- CCost Approach
- DGross Rent Multiplier
Show answer & explanationAnswer & explanation
Correct answer: C. Cost Approach
The Cost Approach is most appropriate for unique or specialized properties where comparable sales are scarce and income data is not relevant. It values the property based on the cost to replace or reproduce it, less depreciation.
Why the other options are wrong
- A. The Sales Comparison Approach is difficult due to a lack of comparable sales.
- B. The Income Approach is not suitable as the property generates no direct rental income.
- D. Gross Rent Multiplier is a simplified income approach, unsuitable for non-income properties.
Cost Approach
The Cost Approach to value estimates the value of a property by summing the estimated land value and the depreciated cost of construction to replace or reproduce the improvements.
- Best for new construction and special-purpose properties.
- Calculates replacement cost minus depreciation plus land value.
- Relies on accurate cost data and depreciation estimates.
Memory trick: Sales compare, Income yields, Cost builds.