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

When is it appropriate to use the cost approach for valuation?

1. When property sales activity is high

2. When no market activity occurs

3. When assessing emotional value

4. When determining market trends

The correct answer is: When no market activity occurs

The cost approach for valuation is most appropriate when no market activity occurs, making this answer the correct choice. This method is particularly useful in scenarios where comparable sales data is insufficient or nonexistent, such as in unique properties or in areas with infrequent transactions. In these situations, valuers focus on estimating the cost to replace or reproduce the property, subtracting any depreciation to arrive at a value. This approach is not reliant on current market activity, which can fluctuate or be non-existent, hence affirming its relevance in such contexts. Although high property sales activity is often indicative of a dynamic market, in such cases, other methods like the sales comparison approach may yield more reliable results. Similarly, assessing emotional value and determining market trends do not align with the objective nature of the cost approach, which is strictly quantitative and focused on the physical and financial aspects of the property.