Cost approach appraisal: Detailing its value in real estate

by Karen Svites Realty, Inc. 02/12/2024

How the cost approach method is used in real estate featured image

The cost approach is one of the three main methods used in real estate to calculate the value of a property. Understanding how it works may be beneficial in your next property purchase. 


What is the cost approach method in real estate?

The cost approach method is the comparison of the price a buyer would pay for a property in comparison to the cost of building the same property from scratch. This includes the land value the property sits on, the cost of building materials needed to construct the property and less depreciation. 


When would you use a cost approach?

The cost approach appraisal is often used in the construction of exclusive-use properties. This includes but is not limited to libraries, schools, religious properties and more. 

These building types generally don’t bring in much income, so using the comparable or income approach (two different methods to figure out the value of a property) won’t bring in accurate results. 

The cost approach is often used in new construction, as market value is reliant upon project quality and completion. Each stage of the project is reappraised to allow the release of funds to complete the following steps of the project. 


What is the formula for cost approach real estate?

Cost approach is calculated using this formula: property values = land values plus cost new + depreciation. 

Please note, a low-cost approach appraisal can be a sign of an overactive market, so it’s best to hire a professional advisor when purchasing a new construction or an exclusive use property.


About the Author
Author

Karen Svites Realty, Inc.

Local Expertise | World Class Service 

My name is Karen Svites. I am a top producer, real estate consultant for buyers, sellers and investors in the Asheville area for over 17 years. I have lived in North Carolina since 1994 and have called Asheville my home and place to raise my wonderful children. I am blessed to live here and be a part of this vibrant community. I enjoy the people, seasons, culture and many outdoor activities available to me.