Texas Real Estate State Practice Exam

Which of the following is not one of the 3 Basic Approaches to Appraisals?

1. Market Data Approach

2. Income Approach

3. Functional Cost Approach

4. Replacement Cost Approach

The correct answer is: Functional Cost Approach

The functional cost approach is not recognized as one of the three basic approaches to appraisals. The three primary methods used for valuation in appraisal practice are the market data approach, the income approach, and the replacement cost approach. The market data approach relies on comparing the property being appraised with similar properties that have recently sold in the area, using sales data to determine the fair market value. The income approach evaluates the property's potential to generate income, often used in commercial real estate, by analyzing the income it produces relative to operating expenses and investment return expectations. The replacement cost approach calculates the cost to replace the property with a similar one, considering current construction costs, adjusted for depreciation. In contrast, the functional cost approach is not a standard method for real estate appraisal; while it may consider aspects of costs and functionality, it does not fit the conventional appraisal framework established for valuing properties in real estate transactions.