What is the cost approach method?

In essence, the cost approach valuation method derives how much it would cost to rebuild an investment property from the ground up. With the cost approach, the property value equals the value of the land, material, and labor costs, minus depreciation. When Is the Cost Approach Method Used?

What is the cost approach in real estate valuation?

The cost approach considers the cost of land, plus costs of construction, less depreciation. The cost approach is considered less reliable than other real estate valuation methods, but can be useful in certain cases such as when evaluating new construction or a unique home with few comparables.

Is the cost approach a metric of market value?

The fundamental premise of the cost approach is that a potential user of real estate will not, or should not, pay more for a property than it would cost to build an equivalent. The cost of construction minus depreciation, plus land, therefore is a limit, or at least a metric, of market value. There are some fairly large assumptions embedded here.

What are the limitations of the cost approach system?

The cost approach system has many limitations in practice. The method assumes that the buyer could find the land to build an identical property and that's not always the case. Higher cost of land on another lot might drive the price up even if building costs are reasonable. Construction costs are another vital factor.