The Cost Approach

Today is our second installment in our series about the different methods used by real estate appraisers to determine property value. On Tuesday, we discussed the sales comparison approach. Today, we’ll cover the cost approach.

To determine a property’s value using the cost approach, an appraiser would first estimate the value of the property if it were vacant. Then he or she would add that value to the current cost of building any structures that are on the property. The appraiser would then figure out the amount of depreciation on the structure and subtract that from the total. Depreciation on the land itself is rarely considered because unless there has been erosion, improper land use, or zoning changes, land typically does not depreciate.

The cost approach is usually used on newer structures, but tends to be less reliable for older buildings and properties. It is most commonly used for public buildings that serve a special purpose, such as a school or a church. The sales comparison approach, which we discussed earlier this week, doesn’t work for public buildings because it is difficult to find recently sold comparable properties. And the income approach, which we’ll discuss in a later post, doesn’t work for a public building appraisal because public buildings typically don’t earn income.    

 By: Present Value

Tags: cost approach, cost approach to real estate appraisal, property valuation
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