ERA Key Realty Services
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.
Hi, I'm Cathy Lomasney and I'd love to assist you. Whether you're in the research phase at the beginning of your real estate search or you know exactly what you're looking for, you'll benefit from having a real estate professional by your side. I'd be honored to put my real estate experience to work for you.
