Cost Approach
Definition
The cost approach estimates a property's value by calculating the current cost to rebuild the improvements, subtracting accumulated depreciation, and adding the land value. It is most reliable for new construction and special-purpose properties.
Example
An appraiser determines that a 20-year-old warehouse would cost $500,000 to replace. Accumulated depreciation is $150,000. The land is valued at $120,000. Property value = $500,000 - $150,000 + $120,000 = $470,000.
Exam Tip
Know the formula: Cost New minus Depreciation plus Land Value. Remember the three types of depreciation—physical deterioration, functional obsolescence, and external obsolescence. External obsolescence is the only type that is always incurable and is never the property owner's fault.
Related Valuation Terms
Real Estate Transfer Taxes
A transfer tax is a tax imposed on the transfer of ownership of real estate.
Property Tax Exemptions and Relief Programs
Various programs and exemptions exist to reduce the property tax burden for specific groups, such as seniors, homesteaders, or veterans.
Depreciation of Investment Property
Depreciation is an accounting method of allocating the cost of an asset over its useful life, allowing investors to deduct a portion of the asset's cost each year.
Property Tax Assessment Limits
Many states have laws to limit how much property taxes can increase each year, regardless of market value fluctuations.
Homestead Portability
Homestead portability allows homeowners to transfer a portion of their accumulated homestead tax savings to a new homestead in the same state.
Income Approach
The income approach estimates a property's value based on the income it generates by converting net operating income into a value estimate using a capitalization rate. It is the preferred method for income-producing properties.
Frequently Asked Questions
Test Your Valuation Knowledge
Practice with exam-style questions to make sure you can apply Cost Approach and other valuation concepts.