101 Concepts for the Level I Exam
Essential Concept 83: Cost Approach to Value Real Estate
Under the cost approach, value is derived by adding the value of the land to the current replacement cost of a new building less adjustments for estimated depreciation and obsolesce.
The steps involved are:
- Estimate the market value of the land
- Estimate the building’s replacement cost
- Adjust for depreciation including.
a. Physical deterioration
b. Functional obsolescence
c. Locational obsolescence
d. Economic obsolescence
Advantages and disadvantages of the cost approach
- Advantage: It is most reliable for new properties with relatively modern design in a stable market.
- Disadvantage: It is less reliable for old properties as it is difficult to estimate the depreciation of properties that are older.