Humber/Ontario Real Estate Course 4 Exam Practice

What is the basis of the cost approach in real estate valuation?

1. Depreciation of building and land improvements

2. Market comparison of similar properties

3. Objective determination of value

4. Future resale value estimation

5. Direct income capitalization

6. Subjective value assessment

The correct answer is: Objective determination of value

The cost approach in real estate valuation is centered around the objective determination of value. This approach operates on the principle that the value of a property can be ascertained by calculating the cost to replace or reproduce the improvements on the property, minus any depreciation, plus the value of the land. This method is particularly useful for properties that are not frequently sold or for unique properties where comparable sales data may not be readily available. The emphasis on an objective determination means that this approach relies on measurable data such as construction costs, age and condition of the property, and land value, allowing for a more standardized assessment of property value. This method provides a systematic way to evaluate a property, as it uses concrete figures rather than subjective opinions about the property’s worth. In contrast, other approaches like market comparison or direct income capitalization rely on subjective interpretations or market fluctuations, making them less objective than the cost approach. Thus, the foundation of the cost approach is firmly rooted in objective analysis, reflecting its reliability in specific real estate scenarios, particularly for new constructions or specialized use properties.