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

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Prepare for the CAPS Exam with a comprehensive study of Module 2. Utilize our practice resources filled with flashcards, multiple choice questions, and thorough explanations to ensure your success!

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Which valuation approach is least effective for older properties?

  1. Sales comparison approach

  2. Cost approach

  3. Income capitalization approach

  4. Market approach

The correct answer is: Cost approach

The cost approach is often considered least effective for older properties due to several factors that can complicate valuation. This approach assesses a property's value by determining the cost of replacing it with a new equivalent, minus depreciation. For older properties, estimating accurate costs can be challenging. The depreciation aspect becomes particularly complex, as older properties may have unique characteristics, architectural styles, or historical significance that are not easily quantified in terms of cost. Furthermore, the cost approach does not always reflect the true market value of older properties, especially if they have been well maintained or have unique features that make them desirable despite their age. This can lead to discrepancies between the calculated value under the cost approach and the actual sale prices observed in the market. On the other hand, the sales comparison and income capitalization approaches can provide a more accurate reflection of an older property's market value. The sales comparison approach uses recent sales data of similar properties to gauge value, which effectively captures the current market dynamics. The income capitalization approach looks at the revenue-generating potential of a property, making it particularly useful for investment properties. Thus, for older properties where cost estimation and depreciation can be uncertain and complex, the cost approach tends to be less effective compared to the other methods.