Cost Approach
A valuation method that estimates value by calculating the cost to reproduce or replace the improvements, subtracting accrued depreciation, and adding the land value. It is most useful for new or special-purpose properties.
The cost approach is based on the principle of substitution — a rational buyer would not pay more for a property than the cost to build an equivalent one. The appraiser estimates the current cost to construct the improvements (either reproduction cost for an exact replica, or replacement cost for a functional equivalent), deducts all forms of depreciation (physical deterioration, functional obsolescence, and external obsolescence), and adds the separately estimated land value. This approach is particularly reliable for newer construction where depreciation is minimal, unique properties with few comparable sales (churches, schools, government buildings), and insurance valuations.
Related Terms
Reproduction Cost
The estimated cost to construct an exact replica of the subject improvements using the same materials, construction methods, workmanship, and design as of the effective date of the appraisal..
Replacement Cost
The estimated cost to construct a building with equivalent utility to the subject improvements, using current materials, standards, and design, but not necessarily an exact replica..
Depreciation
A loss in value from any cause.
Land Value
The market value of a parcel of land as if vacant and available for development to its highest and best use.
Functional Obsolescence
A loss in property value caused by deficiencies or superadequacies within the property itself, such as an outdated floor plan, insufficient electrical capacity, or an over-improvement relative to the neighborhood..
More in Valuation Approaches
View allSales Comparison Approach
A valuation method that estimates a property's value by comparing it to similar properties that have recently sold in the same market area.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Market Value
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus..
Reconciliation
The process by which an appraiser evaluates and weighs the results from the different valuation approaches (sales comparison, cost, and income) to arrive at a final opinion of value..