Property Valuation
Replacement cost in the cost approach uses the cost to build a structure:
AIdentical to the existing building
BOf equal utility using modern materials and current construction methods✓ Correct
CBased on the cost 10 years ago
DAt the lowest possible contractor bid
Explanation
Replacement cost uses current materials and construction methods to build a structure of equal utility — not necessarily an identical replica.
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Key Terms to Know
Appraisal
A professional estimate of a property's market value prepared by a licensed or certified appraiser.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
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