The cost approach is one of the three main methods used in real estate to calculate the value of a property. Understanding how it works may be beneficial in your next property purchase.
The cost approach method is the comparison of the price a buyer would pay for a property in comparison to the cost of building the same property from scratch. This includes the land value the property sits on, the cost of building materials needed to construct the property and less depreciation.
The cost approach appraisal is often used in the construction of exclusive-use properties. This includes but is not limited to libraries, schools, religious properties and more.
These building types generally don’t bring in much income, so using the comparable or income approach (two different methods to figure out the value of a property) won’t bring in accurate results.
The cost approach is often used in new construction, as market value is reliant upon project quality and completion. Each stage of the project is reappraised to allow the release of funds to complete the following steps of the project.
Cost approach is calculated using this formula: property values = land values plus cost new + depreciation.
Please note, a low-cost approach appraisal can be a sign of an overactive market, so it’s best to hire a professional advisor when purchasing a new construction or an exclusive use property.
Kimberly Kelly decided to get her real estate license when she moved to South Orange with her family and fell in love with the classic, period homes of the area. Having worked in the city for many years for LexisNexis, Kim understands the appeal of an easy commute to NYC. That’s why she specializes in towns along the Mid-Town Direct train line, offering welcoming communities, good schools, and space to grow.
Very active in her children’s school PTA, Kim knows firsthand how important a school system is to parents looking to make the move to the ‘burbs. She volunteers with fairs, fundraising, and other activities that bolster support for education. Kim also believes involvement in the greater community enriches us all and has sat on various boards & associations throughout the years.
Kim Kelly has lived many places throughout her life, from Pennsylvania to Oregon, but has found New Jersey to be the ideal place to raise her family and put down roots. She loves nothing more than helping others discover their special place as well. Kim’s extensive knowledge of the area, combined with her sense of community, offers clients a personalized guide to finding the right house - and town - to call home.
