Cost Approach / Cost Manual

 

The cost approach is an important methodology used in the appraisal of many types of real property.  Costs is most similar to market value when improvements are new or nearly new.  Cost approach information is market extracted in that construction costs impact, and are impacted by, the economic of supply and demand in the market.  Since individuals will generally not pay more than the replacement cost of a building improvement on a similar site, the cost approach can be used as a baseline and as a check against other appraisal methodologies.     

 

The cost approach considers the replacement cost of a subject building improvement less all types of depreciation, the site improvements and the value of the underlying land (via the sales approach).

 

The source utilized most often for the cost approach analyses are cost manuals or the actual cost information supplied by the property owner or building contractor.  Most cost figures are provided without consideration for the profit associated with the project.  Appraisers add the profit contribution (entrepreneurial profit) back into the equation in their cost approach calculations.  Also added back are professional fees and holding costs.

 

Costs can be "segregated" down to individual improvements or they can be combined into a cost per area.  Appraisers often use cost data that has combined various improvements in their cost approach analysis.  A residential building is generally analyzed using aggregated cost data that considers; finished surfaces, plumbing systems, electrical systems, foundations, kitchen improvements and standard finished items as detailed within a cost manual. 

 

Replacement cost calculations also take into account all types of depreciation including; physical depreciation, functional obsolescence and external obsolescence.  Typical building lives have been established for appraisers.  An appraiser determination regarding the types and quantities of depreciation are somewhat subjective judgments made by appraisers in the cost approach.    

 

Thus when all factors are considered in the cost approach the calculation becomes; Costs (Improvement and Site) + + Professional Expenses + Holding Costs + Entrepreneurial Profit - Depreciation (from all sources) + Value of the Land (via the Sales Approach) = Market Value.

 

As noted, the cost approach is relied on by appraisers most often when improvements are new, when there is little depreciation, or when the other approaches are not applicable to an assignment.  Special purpose properties like churches are not easily appraised using the sales approach, due to their being few sales available in most markets, or by using the income approach, since churches are not bought and sold based on their income generating capacity.  Thus, the cost approach can become the most important of the three methodologies in some situations.

 

The cost approach can also consider reproduction costs.  The cost of reproduction generally far exceeds the cost of replacement since every item reproduced must be the same and not similar.         

 

Contact us with your questions or concerns regarding costs, the cost approach or regarding your specific appraisal assignment in Nevada at 1-702-568-6699.  We can also be e-mailed at grigdon@cox.net.  

 


                                                     



Copyright 2007 Horizon Village Realty & Appraisal

Commercial Real Estate Appraisals in the Las Vegas & Henderson, Nevada Area.