RAA RAA Cost Approach & Depreciation 1 — Questions and Answers
Question 1: In the cost approach, what does 'reproduction cost' mean?
- Cost to build a functionally equivalent structure using modern materials
- Cost to build an exact replica using the same materials and methods as the original (Correct answer)
- Cost to purchase a comparable property on the open market
- Cost to demolish and clear the existing structure
Correct answer: Cost to build an exact replica using the same materials and methods as the original
Reproduction cost is the cost to build an exact duplicate of the subject using original materials, standards, and design.
Question 2: Which cost approach method estimates improvement value by applying a cost per square foot to the gross living area?
- Quantity Survey Method
- Unit-in-Place Method
- Comparative Unit Method (Square Foot Method) (Correct answer)
- Index Method
Correct answer: Comparative Unit Method (Square Foot Method)
The Comparative Unit (Square Foot) Method multiplies cost per square foot by the building area, making it the most common method in residential appraisal.
Question 3: Physical deterioration in the cost approach is best described as:
- Loss in value due to changes in the neighborhood
- Loss in value caused by wear, tear, and aging of the physical structure (Correct answer)
- Loss in value due to outdated design or floor plan
- Loss in value caused by zoning changes
Correct answer: Loss in value caused by wear, tear, and aging of the physical structure
Physical deterioration is the loss in value from actual wear and tear, deferred maintenance, and age of the improvements.
Question 4: Functional obsolescence resulting from a deficiency (something the subject lacks compared to current market standards) is called:
- Curable physical deterioration
- Incurable functional obsolescence — deficiency (Correct answer)
- External obsolescence
- Superadequacy
Correct answer: Incurable functional obsolescence — deficiency
A functional deficiency is incurable functional obsolescence when the cost to cure exceeds the added value, such as a missing second bathroom in a market that demands two.
Question 5: What is 'superadequacy' in the context of the cost approach?
- An improvement that adds more value than it costs
- An excess feature whose cost exceeds its contribution to market value (Correct answer)
- A property that exceeds local zoning requirements
- A building with above-average physical condition
Correct answer: An excess feature whose cost exceeds its contribution to market value
Superadequacy (over-improvement) is a form of functional obsolescence where an excess feature costs more than its market value contribution.
Question 6: External (economic) obsolescence in the cost approach is always considered:
- Curable by the property owner
- A form of physical deterioration
- Incurable, because it originates from forces outside the property (Correct answer)
- Only relevant to commercial properties
Correct answer: Incurable, because it originates from forces outside the property
External obsolescence stems from factors outside the property (e.g., nearby industrial use, market decline) and cannot be cured by the owner.
RAA RAA Cost Approach & Depreciation 1
In the cost approach, what does 'reproduction cost' mean?