PSI Virginia Real Estate Practice Exam

What does the Cost Approach primarily estimate when determining property value?

1. The market price of similar properties

2. The reproduction or replacement cost of the building

3. The future earning potential of the property

4. The depreciation of the property over time

The correct answer is: The reproduction or replacement cost of the building

The Cost Approach primarily estimates the reproduction or replacement cost of a building to determine property value. This method involves calculating how much it would cost to construct a similar structure using the same materials and standards, or how much it would cost to reproduce the building with modern methods and materials. This approach is particularly useful for new constructions or unique properties where comparable sales data may not be readily available. Using this method, appraisers assess the value of the land as if it were vacant and add it to the estimated cost to replace the building, minus any incurred depreciation. The consideration of depreciation reflects the loss in value due to factors such as wear and tear, obsolescence, or external factors that affect property value. However, the focus remains primarily on estimating the construction cost as the basis for establishing value. This methodology is often employed in situations where the income or comparable sales methods are less applicable, ensuring that property valuations are grounded in the actual cost of construction.