FREE ASA Market & Cost Approaches Questions and Answers

Question 1

Which approach uses recent sales of comparable properties to estimate value?

Accepted Answer

Market approach

Answer

The Market Approach, also known as the Sales Comparison Approach, uses recent sales of comparable properties to estimate the value of a subject property. This method involves analyzing similar properties that have recently sold, making adjustments for differences, and deriving an indication of value based on market transactions.

Question 2

What is the primary use of the cost approach?

Accepted Answer

To determine replacement cost minus depreciation

Answer

The primary use of the Cost Approach is to determine the replacement cost of a property minus any accrued depreciation. This method estimates the value by calculating the current cost to construct a new replica or equivalent property, then subtracting physical deterioration, functional obsolescence, and external obsolescence. It is particularly useful for new or unique properties.

Question 3

What type of depreciation is caused by outdated design or features?

Accepted Answer

Functional obsolescence

Answer

Functional obsolescence refers to a loss in value due to a property's design, features, or utility becoming outdated or inefficient compared to current standards or market expectations. This type of depreciation is internal to the property and arises when its functionality no longer meets modern demands. It directly addresses the issue of outdated design or features.

Question 4

What is the first step in applying the cost approach?

Accepted Answer

Estimate replacement/reproduction cost

Answer

The cost approach to valuation begins by estimating the cost to replace or reproduce the subject property's improvements as if new. This initial step establishes a baseline cost for constructing an equivalent property. Once this cost is determined, depreciation is then subtracted, and the land value is added to arrive at the final value estimate.

Question 5

Which of the following best describes the principle of substitution?

Accepted Answer

Substitution

Answer

The principle of substitution states that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property. This fundamental principle underpins all three approaches to value, as it suggests that market value is limited by the cost of obtaining a similar property with comparable utility. It directly describes the concept of substitution itself.

ASA - American Society of Appraisers Certification Practice Test

ASA - American Society of Appraisers Certification Practice Test

FREE ASA Market & Cost Approaches Questions and Answers