PSI New Jersey Real Estate State Practice Exam

When establishing property value, which method prioritizes the cost of construction and land?

1. Market comparison method

2. Cost approach

3. Income approach

4. Sales price method

The correct answer is: Cost approach

The cost approach is the method that emphasizes the costs associated with constructing a property, including the expenses of both land acquisition and building. This approach operates under the principle that a buyer would not pay more for a property than it would cost to replace it. Therefore, when assessing property value using this method, appraisers calculate the current cost of constructing a similar structure, then add the value of the land, and finally, subtract any depreciation that may have occurred since the property's completion. This is particularly useful for newer constructions or unique properties where market comparables are challenging to find. In contrast, the market comparison method primarily evaluates the values based on the sale prices of similar properties, while the income approach focuses on the income-generating potential of the property, often relevant for investment properties. The sales price method is not a standard appraisal technique and does not specifically prioritize construction costs and land value like the cost approach does. Understanding these differences reinforces why the cost approach is the correct answer in this context.