What does the cost approach to value primarily involve?

The cost approach to value primarily involves estimating the cost to replace a property, minus depreciation. This method is based on the principle that a buyer would not pay more for a property than it would cost to create a similar one from scratch.

In this approach, appraisers calculate the current replacement or reproduction cost of the improvements on the property. Then, they deduct any accumulated depreciation, which reflects factors like physical wear and tear, functional obsolescence, or economic obsolescence. This results in a value estimate that reflects both the cost of creating the property today and the reduction in value due to various depreciation factors.

This approach is particularly useful for properties that are new or unique, where comparable sales data might be scarce, making it difficult to effectively analyze market trends or compare sales of similar properties. It is less focused on current market conditions or income-generating potential, which differentiates it from options that involve market analysis or rental evaluations.