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:

  1. Estimate the market value of the land
  2. Estimate the building’s replacement cost
  3. Adjust for depreciation including.
  4. 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.