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

The broker is estimating the property value using the cost approach.

The cost approach involves determining the value of a property by calculating the cost to replace or reproduce it, including land value and construction costs, while also accounting for any depreciation. This method is particularly useful for properties that do not frequently sell or for new constructions.

A (cost approach.) CORRECT

This approach accurately describes the method the broker is using. By starting with the land value, adding construction costs, and subtracting accrued depreciation, the broker effectively applies the cost approach to estimate the property's value, focusing on the cost to create the property.

B (income approach.) YOUR ANSWER

The income approach values a property based on its potential to generate income, typically used for investment properties. It focuses on the revenue a property can produce rather than its construction costs or depreciation, making it unsuitable for the scenario described.

C (gross rent multiplier.) YOUR ANSWER

The gross rent multiplier (GRM) is a simplified method used to estimate property value based on its rental income. This approach does not involve calculating land value, construction costs, or depreciation, and is thus irrelevant to the broker's valuation process in this case.

D (market comparison approach.) YOUR ANSWER

The market comparison approach estimates property value by comparing similar properties that have recently sold. This method relies on market data rather than the cost of construction or depreciation, making it inappropriate for the valuation method outlined by the broker.

Conclusion

The scenario presented clearly outlines the use of the cost approach, where the broker calculates the land value, adds construction costs, and subtracts depreciation to derive the property value. This method is particularly effective for unique properties or new constructions, distinguishing it from other valuation approaches that rely on income or market comparisons.

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

The broker is estimating the property value using the cost approach.

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