Texas Real Estate Sales Agent ExamValuation and Market AnalysisMedium
An appraiser is valuing a property using the cost approach. The estimated cost to construct a new building with similar utility and function is $400,000. The appraiser estimates that the property has accumulated depreciation of $80,000. The land value is estimated at $100,000. What is the estimated value of the property using the cost approach?
- A$500,000
- B$420,000
- C$320,000
- D$480,000
Show answer & explanationAnswer & explanation
Correct answer: B. $420,000
The formula for the cost approach is: (Cost to build new - Accumulated depreciation) + Land Value. In this case, ($400,000 - $80,000) + $100,000 = $320,000 + $100,000 = $420,000.
Why the other options are wrong
- A. This incorrectly adds all values without subtracting depreciation from the construction cost.
- C. This only calculates the depreciated value of the improvements, omitting the land value.
- D. This sums the construction cost, land, and depreciation, which is incorrect.
Cost Approach Formula
The formula for the cost approach to valuation: Estimated Cost to Build New - Accumulated Depreciation + Land Value = Property Value.
- Land is never depreciated.
- Best for new construction or unique properties.
- Depreciation includes physical, functional, and external obsolescence.
Memory trick: New 'C'ost, 'D'educt 'D'epreciation, 'A'dd 'L'and: 'C' 'D' 'A' 'L'