CGA Cost Approach 3 — Questions and Answers
Question 1: An appraiser uses the 'sales comparison (market extraction)' method to estimate depreciation. What data is primarily analyzed?
- Income capitalization rates from comparable rentals
- Cost manuals adjusted by local multipliers
- Sales of improved properties compared to land value and cost new (Correct answer)
- Building permit records and construction contracts
Correct answer: Sales of improved properties compared to land value and cost new
Market extraction derives depreciation by subtracting land value and cost new from the sale price of comparable improved properties, reflecting what the market actually recognizes.
Question 2: When estimating site value in the cost approach, which method is most appropriate when there are adequate sales of comparable vacant land?
- Land residual technique
- Allocation method
- Sales comparison approach (Correct answer)
- Extraction method
Correct answer: Sales comparison approach
The sales comparison approach is the preferred method for estimating land value when sufficient sales of similar vacant parcels are available in the market.
Question 3: The 'allocation method' of land valuation is used when:
- Vacant land sales are abundant and recent
- Paired sales are used to isolate land value adjustments
- No vacant land sales exist and ratios from comparable markets are applied (Correct answer)
- Income data from similar properties is capitalized
Correct answer: No vacant land sales exist and ratios from comparable markets are applied
The allocation method applies a typical land-to-total-value ratio (derived from similar markets) to the subject's total value when direct vacant land sales are unavailable.
Question 4: What is meant by 'economic life' of an improvement in the cost approach?
- The number of years since the building was constructed
- The total period over which improvements contribute to property value (Correct answer)
- The remaining useful life after accounting for deferred maintenance
- The period required to recover the construction cost through income
Correct answer: The total period over which improvements contribute to property value
Economic life is the total period during which an improvement is expected to contribute to property value, used as the denominator in the age-life depreciation method.
Question 5: A property has a cost new of $500,000 and accrued depreciation of $125,000. Site value is $100,000. What is the value indicated by the cost approach?
- $475,000 (Correct answer)
- $375,000
- $600,000
- $475,000
Correct answer: $475,000
Cost approach value = (Cost New − Depreciation) + Site Value = ($500,000 − $125,000) + $100,000 = $475,000.
Question 6: Which of the following is an example of curable physical deterioration?
- Structural foundation settlement causing permanent damage
- Worn carpet that can be replaced at a cost less than its value contribution (Correct answer)
- Outdated floor plan configuration requiring major reconfiguration
- Neighborhood decline reducing demand for the property
Correct answer: Worn carpet that can be replaced at a cost less than its value contribution
Curable physical deterioration is deferred maintenance where the cost to cure is equal to or less than the resulting increase in value, such as replacing worn carpet.
Question 7: An appraiser estimates depreciation using the 'breakdown method.' Which types of depreciation does this method separately identify?
- Short-lived and long-lived components only
- Physical, functional, and external obsolescence individually (Correct answer)
- Structural and cosmetic deterioration only
- Direct and indirect costs separately
Correct answer: Physical, functional, and external obsolescence individually
The breakdown method separately estimates each type of depreciation—physical deterioration, functional obsolescence, and external obsolescence—and then sums them.
CGA Cost Approach 3
An appraiser uses the 'sales comparison (market extraction)' method to estimate depreciation.
What data is primarily analyzed?