Understanding the Cost Approach in Real Estate Appraisal

When a certified appraiser values a property, they typically consider three approaches to value: the sales comparison approach, the income approach, and the cost approach.

What Is the Cost Approach?

The cost approach estimates value by calculating what it would cost to replace or reproduce the improvements on the property — then subtracting depreciation — and adding the value of the land.

Value = Land Value + Replacement Cost of Improvements - Depreciation

When Is the Cost Approach Most Relevant?

• New or nearly new construction with minimal depreciation
• Special use buildings with few comparable sales (churches, schools, fire stations)
• Lack of sales data for the sales comparison approach
• Insurance purposes requiring a replacement cost estimate

Types of Depreciation

• Physical deterioration — Wear and tear from age and use
• Functional obsolescence — Features that are outdated or no longer desirable
• External obsolescence — Value loss caused by factors outside the property such as proximity to a busy highway

Have questions about how your property is valued? Contact Mantis Valuation Advisors — we are here to help.