NMLS Uniform State Test (UST) Mortgage Practice Exam

In the cost approach to estimating value, the appraiser calculates the cost of constructing a building as if it were new, deducts any depreciation that the building has experienced, and then adds the value of the land on which the building sits. This is because the cost approach is based on the principle that the value of the property is equal to the cost of creating a similar property, assuming no functional or external obsolescence.

The process involves determining the current cost to build the structure at today’s prices, then considering how much value might have been lost over time due to wear and tear, or other factors that affect the property’s condition. By subtracting depreciation from the construction cost and adding the value of the land, the appraiser arrives at an estimate that reflects both the physical condition of the building and the value of the land.

This methodology is particularly useful for new construction or special use properties where comparable sales data may be limited. Thus, the correct answer captures the essential elements of the cost approach, ensuring a comprehensive and accurate estimation of property value.