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Carlisle Mitchell

Insider Tips for Real Estate Investors

By Carlisle Mitchell | Real Estate Pro in Houston, TX

Appraisals - Cost Approach

The cost approach is one of three basic valuation methods.  The others are market, or sale comparison, and income. The fundamental premise of the cost approach is that a potential user of real estate won't, or shouldn't, pay more for a property than it would cost to build an equivalent. 

In cost approach pricing, the market price for the property is equivalent to the cost of land plus cost of construction, less depreciation. It is often most accurate for market value when the property is new.

The cost approach methodology requires certain assumptions, such as the availability of land. If land is not available to build on then it is not possible to substitute existing property. Additionally, the method does not address whether an exactly equivalent structure must be built is to be built, or what if the cost of an equivalent building can be effectively estimated.

 
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