Free ASA Market & Cost Approaches Questions and Answers — Questions and Answers
Question 1: Which approach uses recent sales of comparable properties to estimate value?
- Cost approach
- Income approach
- Market approach (Correct answer)
- Replacement method
Correct answer: Market approach
The Market Approach, also known as the Sales Comparison Approach, uses recent sales of comparable properties to estimate the value of a subject property. This method involves analyzing similar properties that have recently sold, making adjustments for differences, and deriving an indication of value based on market transactions.
Question 2: What is the primary use of the cost approach?
- To compare income streams
- To estimate rental value
- To determine replacement cost minus depreciation (Correct answer)
- To calculate resale value
Correct answer: To determine replacement cost minus depreciation
The primary use of the Cost Approach is to determine the replacement cost of a property minus any accrued depreciation. This method estimates the value by calculating the current cost to construct a new replica or equivalent property, then subtracting physical deterioration, functional obsolescence, and external obsolescence. It is particularly useful for new or unique properties.
Question 3: What type of depreciation is caused by outdated design or features?
- Physical deterioration
- Economic obsolescence
- Functional obsolescence (Correct answer)
- Tax depreciation
Correct answer: Functional obsolescence
Functional obsolescence refers to a loss in value due to a property's design, features, or utility becoming outdated or inefficient compared to current standards or market expectations. This type of depreciation is internal to the property and arises when its functionality no longer meets modern demands. It directly addresses the issue of outdated design or features.
Question 4: What is the first step in applying the cost approach?
- Calculate land value
- Estimate replacement/reproduction cost (Correct answer)
- Add depreciation
- Analyze comparable sales
Correct answer: Estimate replacement/reproduction cost
The cost approach to valuation begins by estimating the cost to replace or reproduce the subject property's improvements as if new. This initial step establishes a baseline cost for constructing an equivalent property. Once this cost is determined, depreciation is then subtracted, and the land value is added to arrive at the final value estimate.
Question 5: Which of the following best describes the principle of substitution?
- Highest and best use
- Anticipation
- Substitution (Correct answer)
- Conformity
Correct answer: Substitution
The principle of substitution states that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property. This fundamental principle underpins all three approaches to value, as it suggests that market value is limited by the cost of obtaining a similar property with comparable utility. It directly describes the concept of substitution itself.
Question 6: External factors such as market downturns cause what type of depreciation?
- Functional obsolescence
- Physical wear and tear
- Economic obsolescence (Correct answer)
- Replacement depreciation
Correct answer: Economic obsolescence
Economic obsolescence, also known as external obsolescence, is a loss in property value due to factors outside the property itself. These external factors can include market downturns, changes in zoning laws, environmental issues, or a decline in the surrounding neighborhood. Unlike functional or physical depreciation, economic obsolescence is generally incurable by the property owner.
Free ASA Market & Cost Approaches Questions and Answers
Which approach uses recent sales of comparable properties to estimate value?