Cost approach valuation is a real estate valuation method that bases a property’s market value off the cost it would take to build an equivalent structure. The cost approach takes into account the cost of land plus the cost of construction, less depreciation. Similar to its counterparts, the cost approach may have other forces that prove it inaccurate. For example, if vacant land is not available to compare against, the professional valuing the property will have to derive an estimate, making the end value less accurate.
There are two main methods of using the cost approach: the replication method and replacement method. The replication method assumes that a replica of the property is built using the same materials with the same pricing. The replacement method assumes the new building has similar function, but with an updated design, utilizing newer materials and current construction techniques.