Which method estimates value based on the principle of substitution and ensures value cannot exceed the cost of a similar site and construction?

Which method estimates value based on the principle of substitution and ensures value cannot exceed the cost of a similar site and construction?

• A. Income Approach
• B. Cost Approach
• C. Sales Comparison Approach
• D. Replacement Cost

Answer: (B)

Substitution is the guiding idea here: a prudent buyer wouldn’t pay more for a property than the cost to obtain a similar substitute. The cost approach uses that principle by estimating how much it would cost to replace or reproduce the improvements (and then adding the land value), with adjustments for depreciation. Because the value is anchored to the replacement cost of a similar site and construction, it won’t exceed what it would cost to build or replace a comparable property. This approach is especially helpful when market data are limited or the property is unique. The other methods rely more on income (future earnings) or on comparing actual recent sales, rather than on replacement cost.

Substitution is the guiding idea here: a prudent buyer wouldn’t pay more for a property than the cost to obtain a similar substitute. The cost approach uses that principle by estimating how much it would cost to replace or reproduce the improvements (and then adding the land value), with adjustments for depreciation. Because the value is anchored to the replacement cost of a similar site and construction, it won’t exceed what it would cost to build or replace a comparable property. This approach is especially helpful when market data are limited or the property is unique. The other methods rely more on income (future earnings) or on comparing actual recent sales, rather than on replacement cost.