A broker is developing an opinion of value by starting with the value of the land, adding the price to construct the improvements, and then subtracting the amount of accrued depreciation. The broker is estimating the property value using the

Rationale

Cost approach.

The broker is utilizing the cost approach to determine property value by assessing the land's value, adding construction costs, and deducting accrued depreciation. This method effectively estimates the value of a property based on the cost of replacing or reproducing the improvements, adjusted for depreciation.

A (cost approach.) CORRECT

The cost approach is a valuation method that calculates property value by summing the land value and the costs of improvements, then subtracting depreciation. This approach is particularly useful for new constructions or properties without significant comparable sales data, as it focuses on the current costs associated with the property.

B (income approach.) YOUR ANSWER

The income approach estimates property value based on the income it generates, typically used for investment properties. This method involves calculating the net operating income and applying a capitalization rate. Since the question focuses on land value and construction costs rather than income generation, this approach is not applicable.

C (gross rent multiplier.) YOUR ANSWER

The gross rent multiplier (GRM) is a valuation technique that uses the relationship between property value and its rental income. It involves multiplying the gross rental income by a predetermined multiplier to estimate value. This method does not pertain to the cost of land and improvements, making it unsuitable for this scenario.

D (market comparison approach.) YOUR ANSWER

The market comparison approach estimates property value by comparing it to similar properties that have recently sold. This method relies on market data rather than construction costs and depreciation, which makes it irrelevant to the broker's valuation process described in the question.

Conclusion

The cost approach is the correct method used by the broker to estimate property value. By evaluating the land's worth, construction expenses, and accrued depreciation, the broker arrives at a comprehensive value assessment. Other approaches such as the income method, GRM, and market comparison focus on different aspects of property valuation and do not apply to this scenario.

A broker is developing an opinion of value by starting with the value of the land, adding the price to construct the improvements, and then subtracting the amount of accrued depreciation. The broker is estimating the property value using the

Cost approach.

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