1. The Cost Approach

2. Relation to Appraisal Principles
Substitution
Supply and demand
Balance
Externalities
Highest and best use
Stabilization
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3. Applicability and Limitations
Often seen as the highest price that market participants would pay
Most applicable when improvements are new and land value is well established
Less applicable to older properties and properties for which the effect of functional problems on value is hard to support
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4. Procedure Land value Reproduction cost versus replacement cost
Cost estimates
Direct costs – usually in the builder’s contract to build
Indirect costs – costs outside the building contract but still part of the cost of construction
Entrepreneurial incentive and entrepreneurial profit
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5. Procedure, continued Depreciation
Physical deterioration – caused by wear and tear or the passage of time
Functional obsolescence – usually the result of the property no longer conforming to a market requirement or not in compliance with highest and best use
External obsolescence – caused by factors outside the property
Depreciation in appraising and accounting
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6. Cost Approach Procedure Example
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