Texas Real Estate State Practice Exam

Which approach focuses on determining how much it would cost to reproduce or build a property?

1. Income Approach

2. Market Data Approach

3. Cost Approach

4. Functional Obsolescence Approach

The correct answer is: Cost Approach

The correct answer is the Cost Approach. This valuation method centers on estimating the cost to reproduce or replace a property, making it especially useful for properties that do not frequently sell or have few comparables in the market. It involves calculating the current cost of building the same property from scratch, minus any depreciation, which gives an insight into what the property would be worth based on construction costs rather than market conditions or income generation. The other approaches serve different purposes. For example, the Income Approach focuses on determining a property's value based on the income it generates, often used for investment properties. The Market Data Approach compares similar properties that have sold recently to estimate value based on market trends. Functional Obsolescence specifically addresses the loss of value due to outdated features or designs that no longer meet current standards, rather than the cost to reproduce a property. Each of these methods helps appraisers and real estate professionals assess value from different perspectives, but the Cost Approach distinctly emphasizes the construction costs associated with reproducing a property.