PSI New Jersey Real Estate State Practice Exam

Which method is typically most useful for establishing the value of a special-purpose building?

1. Cost approach

2. Income approach

3. Sales comparison approach

4. Market analysis

The correct answer is: Cost approach

The cost approach is particularly useful for determining the value of a special-purpose building because this method focuses on estimating the cost to replace or reproduce the building, minus any depreciation. Special-purpose properties, such as schools, churches, hospitals, or government buildings, may not regularly sell in the market and often have little comparable sales data that would lend themselves well to the sales comparison approach. Given that these buildings often have unique features or purposes that separate them from standard commercial properties, the cost approach allows appraisers to assess the value based on the specific costs involved in constructing a similar building from scratch. This includes direct costs such as materials and labor, as well as indirect costs like permits and fees. By evaluating what it would take to create the building anew, along with factoring in depreciation, the cost approach provides a clear framework for valuation especially for properties that do not generate income or have sales data readily available. In contrast, the income approach is typically more suitable for investment properties where the cash flow generated by the property is a key factor in its valuation. The sales comparison approach relies on previous sales, which may not be available for unique special-purpose buildings. Market analysis is a broader term that can encompass various assessment methods but does not specifically drill down into valuation