chapter 16 cost approach

Question 1

Which of the following statements regarding the comparative approach is FALSE?

1. The income approach is similar to the comparative approach; both rely on market evidence from similar properties.
2. The comparative approach reflects market behaviour and requires a minimum of subjective opinion from the appraiser.
3. The residual method is only applicable when determining the highest and best use of the land as vacant.
4. The cost approach assumes that the improvement’s replacement cost new may exceed its market value.

Answer 1

Correct Answer: 3

Option (3) is false because the residual method may also be used to determine the value of the building as the residual amount. In this case, the land value may be known using the comparative approach and the value of the improvements is unknown. Option (1) is true because instead of comparing similar sales, the income approach compares revenues and expenses relative to the sale prices of similar properties. Option (2) is true, market data reflects market expectations; the proviso is that the quality of, and market data selected, is based on the appraiser’s experience and judgement. Option (4) is true because the improvement’s replacement cost new may exceed its market value since the cost of producing the asset may not directly relate to market expectations. An example is in the case where an individual with a personal preference to have their house built using triple glazed windows vs. double glazed windows (standard in the marketplace).

Question 2

Consider a mid-size warehouse situated in downtown Vancouver, between the Scotiabank and HSBC buildings, both of which are skyscrapers. The warehouse is rented for storage space on a monthly basis, earning $60,000 in income per year. Which of the following options as an estimate of value would be most suitable for this property?

1. Comparative approach
2. Residual method
3. Income approach
4. Cost approach

Answer 2

Correct Answer: 2

Since the warehouse is located between two skyscrapers in downtown Vancouver and earns only $60,000 per year, it is unlikely that the warehouse represents the property’s highest and best use. In this case, the property possesses great potential for redevelopment. Thus, option (2) is correct, as the residual method will provide the most accurate estimate of value.

Question 3

Kathy Myers, a professional appraiser, recently moved to a small suburban residential area. She has been asked to appraise a historic church which is located in the middle of a residential neighbourhood. Which approach of appraisal is Kathy most likely to use?

1. Income approach
2. Comparative approach
3. Investment approach
4. Cost approach

Answer 3

Correct Answer: 4

An appraiser who is asked to find the market value of a church would not be able to use the comparative or investment approaches due to the lack of available market data. The cost approach which determines the value of a property by adding the market value of the site to the cost of replacing the existing building, would be the most applicable method to use under these circumstances.

Question 4

When appraising older buildings using the cost approach, the most difficult aspect to calculate is:

1. the value of the land.
2. the amount of depreciation.
3. the cost of replacing the building.
4. the value of the building, new.

Answer 4

Correct Answer: 2

This question required you to know that when using the cost method of appraisal on an older building, determining the amount of depreciation is difficult. Generally, the value of the land and the cost of replacing the building can be determined quite easily.