A property that contains a 2,500-square-foot house has a land value of $45,000. The house suffers from $7,000 of physical depreciation and $2,500 of…

The value of the property is determined using the cost approach formula: (Replacement Cost New - Accrued Depreciation) + Land Value = Property Value.

1. Calculate Replacement Cost New: 2,500 sq. ft. × $75/sq. ft. = $187,500.

2. Calculate Total Accrued Depreciation: $7,000 (physical) + $2,500 (functional) = $9,500.

3. Calculate Depreciated Value of Improvement: $187,500 - $9,500 = $178,000.

4. Calculate Total Property Value: $178,000 (improvement) + $45,000 (land) = $223,000.

This step-by-step calculation demonstrates how the land value is added to the depreciated cost of the improvements to arrive at the final property value.

A. $178,000: This figure represents the depreciated value of the house (improvement) only and incorrectly omits the addition of the $45,000 land value.

B. $187,500: This is the replacement cost of the house alone, without subtracting any depreciation or adding the value of the land.

D. $232,500: This value is calculated by adding the replacement cost ($187,500) and the land value ($45,000) but fails to account for the total depreciation of $9,500.

1. The Appraisal Institute. (2013). The Appraisal of Real Estate (14th ed.). This authoritative text outlines the cost approach methodology. Chapter 29, "The Cost Approach," specifies the formula as the cost of improvements new, less accrued depreciation, plus the value of the site. The calculation in the question directly follows this procedure.

2. Ling, D. C., & Archer, W. R. (2018). Real Estate Principles: A Value Approach (6th ed.). McGraw-Hill Education. Chapter 7, "Valuation Using the Cost Approach," details the process: "The indicated value of the subject property... is the sum of the estimated cost of the improvements (net of depreciation) and the estimated value of the land." (p. 180).

3. New Jersey Real Estate Commission. (2023). New Jersey Real Estate License Law and Rules. N.J.S.A. 45:15-1 et seq. and N.J.A.C. 11:5-1.1 et seq. The pre-licensure curriculum, mandated by the Commission, requires competency in real property valuation, including the application of the cost approach as a standard appraisal method. The principles applied are standard across the appraisal profession.