Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What does the cost approach to property valuation assess?

1. The net income generated by the property

2. The current cost to reproduce or replace the building

3. The historical sales data of the property

4. The ongoing maintenance costs of the property

The correct answer is: The current cost to reproduce or replace the building

The cost approach to property valuation focuses on determining the current cost to reproduce or replace a building with a similar one that has equivalent utility. This method involves estimating the cost of constructing a replica of the subject property at today’s prices, while accounting for depreciation that reflects the wear and tear on the property and any loss in value due to obsolescence. This approach is particularly useful for new or unique properties where comparable sales data may be scarce or unreliable. By evaluating the cost of replacement, the cost approach provides a solid benchmark for assessing a property's value based on its physical characteristics and current construction costs. It does not directly take into account elements like net income, historical sales data, or ongoing maintenance costs, making it distinct from other valuation methods that may prioritize those factors.