California Real Estate Practice Exam

An appraiser would use which method to estimate the cost of a new structure?

1. Capitalization approach

2. Comparative square or cubic foot, unit in place, quantity survey

3. Direct comparison

4. Income approach

The correct answer is: Capitalization approach

The correct answer is the method that involves the Comparative square or cubic foot, unit in place, quantity survey. This approach is specifically designed to estimate the cost of constructing a new structure. In this method, appraisers assess the cost based on the size of the structure, either through square or cubic footage, and can adapt the estimate based on factors such as materials, labor costs, and the local construction market conditions. The capitalization approach, which you chose, is typically used to determine the value of income-producing properties by estimating the income that the property is expected to generate and applying a capitalization rate. This method is more applicable to existing properties where income is a significant factor. The direct comparison method involves comparing the subject property to similar properties that have recently sold, which is more geared toward pricing existing properties rather than estimating the costs for new construction. Lastly, the income approach focuses on the income generated by a property, which is different from estimating construction costs. This method considers the potential earnings rather than the expenses involved in building a new structure. Thus, the comparative method is the most relevant for estimating the costs of a new construction.