A Malibu coastal property has a land value of $3,500,000 and depreciated improvements of $250,000, yielding a cost approach indication of $3,750,000. Comparable sales, however, suggest a value of $4,200,000. What does this $450,000 discrepancy MOST likely indicate?

Correct Answer

D) The land value may be understated, or the market is recognizing an intangible location premium such as ocean views, coastal scarcity, and lifestyle appeal that the cost approach cannot capture

The cost approach derives value by adding land value to depreciated improvement cost. In premium coastal markets like Malibu, this additive method frequently underestimates value because it cannot quantify intangible buyer premiums — ocean views, scarcity of buildable coastal lots, and lifestyle desirability. When sales consistently exceed the cost approach indication, it signals either that land value is understated or that the market is pricing factors the cost approach structurally cannot capture. This is a recognized limitation of the cost approach in highly desirable, land-value-dominant markets.