What is the cost approach method in real estate?

by Lena and Rich Benenati 08/27/2023

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

Lena and Rich Benenati

Lena and I have been helping our clients buy and sell real estate since 2002, marking over 26 years of combined market experience! We will earn your trust by utilizing proven marketing strategies, certified professional negotiating skills, and targeted technology. Add to this our local market insight and consistent follow up, and it adds up to a great experience for you! A family owned and operated business, we strive to be your trusted adviser, helping you navigate the home buying and selling processes. It is our mission to combine our extensive experience and superior customer service together with a positive attitude to ensure that you enjoy your buying or selling experience. Our customer service extends beyond the sale, providing you with useful information regularly and connecting you with the resources you need, when you need them. This is why an exceptionally high 80% of our business is referred to us by our past clients. We look forward to exceeding your expectations, in English or Spanish as you desire. Lena & Rich, a team you can trust, for everything real estate.