Real Estate Appraisal Practice Exam

Why is the cost approach seldom used to value older properties?

1. It's difficult to accurately estimate depreciation with an older property.

2. Market conditions fluctuate too often.

3. Older properties have no comparable sales.

4. Appraisers prefer income-based methods for older properties.

The correct answer is: It's difficult to accurately estimate depreciation with an older property.

The cost approach is seldom used to value older properties primarily because it involves estimating the cost of constructing a replica of the property and then depreciating that value to account for physical and functional obsolescence. With older properties, accurately estimating the level of depreciation becomes challenging due to various factors, such as wear and tear, outdated features, and changes in market demand. Older properties may have unique characteristics that complicate the assessment of their current value versus the cost of building anew, making it difficult to establish an appropriate depreciation rate. This complexity often leads appraisers to rely on other methods that more effectively capture the true market value, such as the sales comparison or income approaches, particularly when there is a lack of modern comparables. While fluctuations in market conditions can impact valuation methods, they are not as decisive a factor in the cost approach for older properties as the challenges surrounding depreciation estimation. Similarly, while it may be challenging to find comparable sales for unique older properties, this is secondary to the core issue of how to accurately assess depreciation. Income-based methods can provide a more reliable valuation framework for older buildings that generate rental income or have significant historical or architectural value.