Cost approach – best when valuing new buildings and special or unique structures
Appraisers setting value using the cost approach calculate the current construction cost to replace the improvements. From the replacement cost, appraisers subtract their estimate of the accrued depreciation of the existing improvements due to obsolescence and deterioration to get the current replacement value of the improvements.
Added to this is the value of the land as though it was vacant. Thus, the appraised market value under the cost approach is the result of totaling the value of the lot plus the cost to replace the improvements minus obsolescence and physical deterioration (depreciation).
The cost approach is best used when valuing new buildings and special or unique structures, such as churches and factories.
Also, an appraiser places more emphasis on the cost approach when recent comparable sales are not sufficient or the property has no income.
Estimating the cost of improvements which would be incurred today to construct the improvements as they exist on the property involves the calculation of direct and indirect costs.
Direct costs include labor and materials used to construct the improvements.
Indirect costs include expenditures other than labor and materials, including permits and other governmental fees, insurance, taxes, administrative costs and financing charges.
Related article:
