Texas Property Tax Consultant Practice Exam

What is the primary focus of the cost approach in property valuation?

1. Gathering sales of comparable properties

2. Estimating the current cost to construct the existing structure

3. Applying valuation principles to the existing structure

4. Reviewing rent rolls and income

The correct answer is: Applying valuation principles to the existing structure

The primary focus of the cost approach in property valuation is to estimate the current cost to construct the existing structure. This method involves determining what it would cost to replace a property with a similar one of equal utility. It starts with assessing the land value separately, then adds the cost to reproduce or replace the improvements, adjusting for depreciation due to age, wear and tear, or other factors that may affect the value of the property. This approach is particularly useful in situations where there are few comparable sales or in unique properties that don’t have a lot of market data available. While gathering sales of comparable properties and reviewing rent rolls represent important valuation methodologies, they are not the primary focus of the cost approach. Instead, this approach is distinctly rooted in understanding and quantifying the expenses associated with creating or replacing the physical structure on the property.