TheoryReal Estate Appraiser Practice Test Video
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Q1The cost approach to value is based on the principle that a buyer will pay no more for a property than the cost to:
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✓ Correct answer: Acquire an equivalent substitute site and construct an equally desirable improvement
The cost approach rests on the substitution principle: a rational buyer will pay no more than the cost to acquire a comparable site and build an equally desirable improvement. This sets an upper limit on value.
Q2Which type of property is the cost approach MOST applicable to appraise?
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✓ Correct answer: Special-purpose properties such as schools, churches, or public buildings
The cost approach is most reliable for special-purpose or unique properties (schools, churches, government buildings) because there are few comparable sales or rental data from which to develop the sales comparison or income approaches.
Q3The basic formula for the cost approach is:
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✓ Correct answer: Land value + Depreciated cost of improvements
The cost approach value indicator equals land value (as if vacant) plus the depreciated cost of improvements. Depreciated cost equals cost new minus accrued depreciation.
Q4In the cost approach, why is land always valued as if vacant and available for its highest and best use?
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✓ Correct answer: Because land value must reflect its potential without the existing improvement so that depreciation can be applied only to the building
Land is valued separately as though vacant so that all accrued depreciation can be properly identified and deducted from the improvement cost. Combining land and building would make it impossible to isolate building depreciation.
Q5Reproduction cost is defined as the cost to create:
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✓ Correct answer: An exact replica of the subject improvement using the same materials, design, and construction quality
Reproduction cost is the cost to replicate the subject improvement exactly — same materials, workmanship, design, and layout — at current prices. It differs from replacement cost, which uses modern materials and standards.
Q6Replacement cost is defined as the cost to construct:
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✓ Correct answer: A building of equal utility using modern materials, design, and construction standards
Replacement cost is the cost to build a building of equal utility using current materials, methods, and standards — not an exact replica. This is the most commonly used cost basis in appraisal.
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