The cost approach is one of the three main methods used in real estate to calculate the value of a property. Understanding how it works may be beneficial in your next property purchase.
The cost approach method is the comparison of the price a buyer would pay for a property in comparison to the cost of building the same property from scratch. This includes the land value the property sits on, the cost of building materials needed to construct the property and less depreciation.
The cost approach appraisal is often used in the construction of exclusive-use properties. This includes but is not limited to libraries, schools, religious properties and more.
These building types generally don’t bring in much income, so using the comparable or income approach (two different methods to figure out the value of a property) won’t bring in accurate results.
The cost approach is often used in new construction, as market value is reliant upon project quality and completion. Each stage of the project is reappraised to allow the release of funds to complete the following steps of the project.
Cost approach is calculated using this formula: property values = land values plus cost new + depreciation.
Please note, a low-cost approach appraisal can be a sign of an overactive market, so it’s best to hire a professional advisor when purchasing a new construction or an exclusive use property.
Marilyn Mayberry has had the honor and privilege of engaging in one of the most exciting careers imaginable. She has marketed the American dream of home ownership for over 40 years. Marilyn is the Associate Broker for her own boutique brokerage Real Estate Today LLC in Farmington Hills. Her company offers a complete line of residential and commercial services to buyers and sellers.
Buying or selling real estate is probably one of the most important decisions anyone will make in a lifetime. Marilyn’s passion for the real estate business assures that the transaction will be handled with the highest degree of professionalism. This philosophy has allowed her to build a community of lifelong relationships.
