What does the cost approach in appraisal estimate?

The cost approach in appraisal focuses on estimating property value based on the cost to replace or reproduce the property minus any depreciation. This method involves calculating the current cost to construct a similar structure, accounting for the land's value as well. The rationale behind this approach is that a buyer would not pay more for a property than it would cost to build it new, adjusted for any wear and tear or obsolescence that has affected the original structure.

This method is particularly useful for appraising unique or special-use properties where comparable sales may be limited. By relying on the replacement cost and deducting depreciation, appraisers can form a well-founded estimate of value that reflects both the investment put into the property and its current condition. Understanding the cost approach is important as it provides a clear framework for determining value based on the tangible aspects of the property rather than external market conditions or income potential.