Arizona Real Estate License Practice Exam

In the context of real estate valuation, particularly using the cost approach, the principle of substitution plays a critical role. This approach estimates value based on what it would cost to reproduce the property, considering current market conditions and construction costs.

When Jack considers the lack of a garage and believes it has a negative impact on the home's value, he is acknowledging a form of depreciation or a cost that isn't accounted for in the current appraisal. In the cost approach, one would typically calculate the cost of constructing a similar home with a garage and then adjust the appraised value down to reflect the absence of that feature.

If the appraised value (based on the cost approach) was initially set at a higher amount that assumes the presence of a garage, Jack would then subtract the cost associated with constructing a garage to derive his final estimate. Therefore, his final estimate of $178,500 suggests he has deducted a significant amount to reflect the decrease in value due to the lack of this feature, aligning with his belief about the impact on the property's worth.

The other values presented likely represent appraised values either with the garage included or adjusted less significantly, reflecting a lower perceived impact on value than Jack has concluded.