What is the cost approach in real estate?

What Is the Cost Approach? The cost approach is a real estate valuation method that estimates the price a buyer should pay for a piece of property is equal the cost to build an equivalent building. In the cost approach, the property's value is equal to the cost of land, plus total costs of construction, less depreciation.

How does the coast approach value real estate?

Instead of focusing on the prices other, similar homes in the area are selling for, or a property’s ability to generate income, the coast approach method values real estate by calculating how much the building would cost today if it were destroyed and needed to be replaced from start to finish.

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 is the cost approach valuation method?

The cost approach valuation method is sometimes referred to as the contractor’s valuation method. The cost approach is one of the three main methods used in calculating the value of real estate properties.