Texas Property Tax Consultant Practice Exam

What is one common method to assess property value according to the cost approach?

1. Sales comparison approach

2. Income approach

3. Depreciated replacement cost

4. Market value analysis

The correct answer is: Depreciated replacement cost

The concept of the cost approach to property valuation is centered around determining the value of a property based on the cost to replace or reproduce the asset, minus any depreciation. The method known as depreciated replacement cost involves estimating how much it would cost to replace the property with a similar one and then accounting for any loss in value due to physical wear and tear, functional obsolescence, or external factors. This approach is particularly useful in scenarios where properties are unique or do not frequently sell in the market, making comparisons with recent sales or income generation less applicable. Therefore, using the depreciated replacement cost provides a tangible assessment based on current costs and conditions, reflecting how much a buyer would realistically pay absent of market fluctuations or investor-driven valuations. In contrast, the sales comparison approach best applies when there are sufficient comparable sales to assess value based on what similar properties have sold for. The income approach, meanwhile, focuses on the revenue a property generates, which is not directly related to the cost basis of the asset. Lastly, market value analysis typically aggregates various market factors to estimate value and is not linked specifically to the cost-based assessment of the property itself. Thus, the appropriateness of the depreciated replacement cost method aligns perfectly with the tenets of the cost