Property Valuation
What is 'reproduction cost' versus 'replacement cost' in the cost approach to appraisal?
AThey are the same; the terms are interchangeable
BReproduction cost is the cost to build an exact replica; replacement cost is the cost to build a functionally equivalent structure with modern materials✓ Correct
CReproduction cost uses current prices; replacement cost uses historical prices
DReproduction cost applies to land; replacement cost applies to buildings
Explanation
Reproduction cost is the cost to construct an exact duplicate of the existing structure using the same materials, design, and quality at current prices. Replacement cost is the cost to construct a structure with the same utility (function) but using modern materials and current construction standards.
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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.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
DepreciationA reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
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