Certified Pennsylvania Evaluator Practice Exam

What type of properties is the Cost Approach best suited for?

1. Properties with high market activity

2. Standard residential homes

3. Properties with special use or highest and best use

4. Commercial office buildings

The correct answer is: Properties with special use or highest and best use

The Cost Approach is best suited for properties that are unique or have special uses because it focuses on estimating the current cost of reconstructing a property on the basis of its physical and functional characteristics. This approach is particularly useful when dealing with properties that do not frequently sell on the open market or when there’s limited comparable sales data available to assess value through the Sales Comparison Approach. In the case of properties with special use, such as schools, churches, or specialized industrial facilities, there may not be sufficient comparable sales to provide a reliable market value. The Cost Approach allows appraisers to evaluate what it would cost to replace or reproduce the property, making this method very effective for these types of unique or specialized properties. For standard residential homes or commercial office buildings, there is typically a more active market, making the Sales Comparison Approach a more relevant and accurate method. Properties with high market activity often have numerous comparable sales, so appraisers can derive a value based on market trends rather than reconstruction costs. Therefore, while the Cost Approach can be applied in those scenarios, it is not generally the preferred method, which makes the Cost Approach especially favorable for properties with special use.