Humber/Ontario Real Estate Course 3 Exam Practice

The cost approach, when applied to resale property, is primarily:

1. Associated with high financial risks for buyers

2. Based on objective value

3. Effective if depreciation is not a consideration

4. Rarely used for tangible asset appraisals

5. Similar to the principle of conformity

6. Used mostly for unique industrial constructions

The correct answer is: Based on objective value

The cost approach in real estate valuation is fundamentally centered on determining the value of a property based on the costs required to replace or reproduce it, minus any depreciation. This method is particularly useful when establishing an objective value for properties, as it accounts for the costs associated with construction and improvements, making it a straightforward and systematic approach. When applied to resale properties, the cost approach emphasizes tangible factors such as land value and construction costs rather than subjective factors like market trends or buyer sentiment. The objective nature of this method helps in providing a more measurable and clear assessment of a property's worth based on current costs. Other options do not align with the core principles of the cost approach. For example, while the method addresses financial aspects, it is not inherently associated with high financial risks for buyers. Similarly, the cost approach can consider depreciation as a critical factor in determining value, meaning its effectiveness is not contingent on ignoring this aspect. It is also not limited to unique industrial constructions, as the cost approach is applicable across various property types. Moreover, the principle of conformity relates more to how properties achieve value by conforming to their surroundings, which is outside the purview of the cost approach.