Affiliate Broker Tennessee (TN PSI) National Practice Exam `

When is the use of the Cost approach most effective in appraisals?

1. For older properties with a stable market

2. For newly constructed homes

3. When dealing with commercial properties

4. For unique historic properties

The correct answer is: For newly constructed homes

The Cost approach is most effective for newly constructed homes due to the fact that it accurately reflects the relationship between the costs of construction and the value of the home. In the case of a new property, appraisers can determine the cost of materials and labor needed to build the property from the ground up, which often provides a reliable baseline for valuation. Newly constructed homes reflect contemporary construction standards and market trends, making it simpler to assess their current value based on how much it costs to create the home from scratch. This approach combines the actual costs incurred with an estimate of depreciation, providing a clear and logical value. In contrast, while the Cost approach can sometimes be applied to older properties or unique historic properties, it may not always reflect true market value since these homes may have characteristics that influence their worth beyond mere construction costs. Similarly, commercial properties may involve additional complexities such as income generation potential and market dynamics that are better analyzed through other appraisal methods, such as the Income approach.