Cost Approach Appraisal

The Cost Approach Appraisal is a real estate valuation method that estimates the value of a property based on the cost to replace or reproduce it, minus any Depreciation. This approach is particularly useful for properties that are not frequently sold in the market or for unique properties where comparable sales data may be limited.

To apply the Cost Approach, an appraiser typically follows these steps:

• Determine the current cost to construct a similar property (using either replacement cost or reproduction cost).
• Calculate the Depreciation of the property, which can include physical deterioration, Functional Obsolescence, and external obsolescence.
• Add the land value to the depreciated cost of the improvements to arrive at the total property value.

For example, if a new commercial building costs $1 million to construct and has a Depreciation of $200,000, and the land value is estimated at $300,000, the total value using the Cost Approach would be:

• Cost of construction: $1,000,000
• Less Depreciation: -$200,000
• Land value: +$300,000
• Total value: $1,100,000

A case example could involve a school building where the appraiser determines it would cost $5 million to build a similar facility today, estimates Depreciation at $1 million due to age and wear, and concludes that the land value is $1 million. Thus, the value using the Cost Approach would be:

• Cost of construction: $5,000,000
• Less Depreciation: -$1,000,000
• Land value: +$1,000,000
• Total value: $5,000,000