Beyond its use as independent method
to determine property value, the cost approach presents a
highly effective way to verify market and income-based valuations,
project construction costs and adjust estimates to account
for unique physical property features.
As an independent
An essential valuation method, the cost approach is crucial
to various appraisal assignments, including when appraising
new or proposed construction, when lack of market activity
limits the effectiveness of the sales comparison (market)
approach, when land value is well supported, when improvements
represent the best use of land, and for special purpose or
specialty properties not frequently exchanged.
opinion of market value
Based on the reasoning that a buyer will not pay more than
what it would cost to reproduce or replace the subject property,
the cost approach enables the appraiser to develop an opinion
of market value based on the current costs of labor, materials,
related fees, and any entrepreneurial profit or incentive.
Marshall & Swift provides the cost data needed to determine
appraisals and monitor local real estate markets
Today's real estate market presents unique challenges to both
the sales comparison and income approach. Overinflated markets
often lead to inaccurate valuations that misrepresent the
When verifying sales comparison estimates, the cost approach
is an excellent way to identify a runaway or rapidly declining
market. For example, if the cost approach comes in well below
market prices, it may be a signal that the market is raising
beyond sustainable levels. On the other hand, if the cost
approach comes in significantly above the market, it may signal
that market prices have dropped below reasonable levels.
To read more about the importance of the cost approach in
maintaining realistic values, download
"How the Cost Approach Shines the Light on a Troubled Market."