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Valuation & Market Analysis term

Replacement Cost

The cost to construct a building of equivalent utility using current materials and design standards.

Why Replacement Cost matters on the exam

This term belongs to Valuation & Market Analysis. The questions below are real items from Freehold's bank that use it - each one cites its source.

Exam questions using Replacement Cost

Every Freehold question shows why the right answer is right — and cites its source.

In a condemnation proceeding, just compensation is generally based on the property's:

  1. Original purchase price paid by the current owner
  2. Fair market value at the time of the taking
  3. Assessed value used for property tax purposes only
  4. Replacement cost of the improvements, ignoring the land
Show answer & explanation

Fair market value at the time of the taking — Just compensation is measured by the property's fair market value as of the date of the taking, reflecting what a willing buyer would pay a willing seller.

Source: PSI National Real Estate Exam Content Outline §2 Land Use Controls

Market value is best defined as:

  1. The price the seller originally paid for the property
  2. The assessed value used for property taxation
  3. The replacement cost of the improvements less depreciation
  4. The most probable price a property should bring in an open, competitive market
Show answer & explanation

The most probable price a property should bring in an open, competitive market — Market value is the most probable price a property should bring in a competitive and open market, with informed buyer and seller acting prudently and without undue stimulus. Price paid and assessed value can differ substantially.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

Which appraisal approach begins by estimating the value of the land as though vacant and then adds the depreciated cost of the improvements?

  1. Income capitalization approach
  2. Sales comparison approach
  3. Cost approach
  4. Land residual method
Show answer & explanation

Cost approach — The cost approach values a property by adding the estimated land value to the reproduction or replacement cost of the improvements, less accrued depreciation.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

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