What is a cost approach?

The logic behind the cost approach is that it makes little sense for buyers to pay more for a property than what it would cost to build from scratch. Reproduction method: This version considers what a replica of the property would cost to be built and gives attention to the use of original materials.

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.

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 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.