The cost approach is a method used in real estate appraisal to estimate the value of a property by considering the cost to replace or reproduce it. Here’s a breakdown of the four steps:

  1. Estimate Reproduction Cost: Calculate how much it would cost to build an exact replica (reproduction) or a similar structure (replacement) of the existing building using current construction costs. This includes labor, materials, and other costs.
  2. Subtract Accrued Depreciation: Determine and subtract the value lost due to factors such as age, wear and tear, functional obsolescence, or external factors (e.g., a decline in the neighborhood). This gives the depreciated value of the building.
  3. Estimate the Value of the Land: Appraise the land separately based on its current market value, considering its location and zoning without the improvements (structures).
  4. Add the Land Value to Derive Indicated Value: Finally, add the depreciated value of the building (from step 2) to the land value (from step 3) to arrive at the total indicated value of the property.

This approach is commonly used for new or unique properties where comparables may be lacking.