Cost Approach

The cost approach is a real estate valuation method that determines the value of a property by estimating the cost to replace or reproduce it, minus depreciation. This approach assumes that a buyer would not pay more for a property than it would cost to build an equivalent one. The cost approach is most useful when appraising new construction or unique properties, where market comparables are limited.

Example

To appraise a newly built home, an appraiser uses the cost approach by estimating the construction cost of the building, subtracting depreciation (if any), and adding the land’s value.