Property Valuation
Which of the following would cause an appraiser to use the cost approach as the primary method of valuation?
AThe property is a 40-year-old ranch home in a mature subdivision
BThe property is a newly constructed special-purpose church building✓ Correct
CThe property is a 10-unit apartment complex
DThe property is a commercial strip mall
Explanation
Special-purpose buildings (churches, schools, hospitals) lack comparable sales in most markets, making the sales comparison approach unreliable. The cost approach is the primary method when comparable sales are sparse.
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Key Terms to Know
Comparable Sales (Comps)
Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
AppraisalA 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.
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