VALUATION TUTORIAL

Valuation Tutorial

Valuation Tutorial

Value of the subject property

The Cost Approach

A real estate valuation method that surmises that the price someone should pay for a piece of property should not exceed what someone would have to pay to build an equivalent building. In cost approach pricing, the market price for the property is equivalent to the cost of land plus cost of construction, less depreciation. It is often most accurate for market value when the property is new. Cost approach is one of three popular valuation methods for real estate; the others are the income approach and the comparables approach. The cost approach methodology requires certain assumptions, such as the availability of land. If land is not available to build on then it is not possible to substitute existing property. Additionally, the method does not address whether an exactly equivalent structure must be built is to be built, or what if the cost of an equivalent building can be effectively estimated.

Cost Approach= Cost of land + construction cost - depreciation

$220,000+$4500+$253,460+$68000

$545,960

In valuation, we often view cost approach as a way of reflecting comparable prices on a contiguous market (i.e. construction market vs. the market for completed buildings) and that we do when the most closely comparable analogs - i.e. comparables trading on the market for completed properties - are not available for observation. Therefore, in order to make do in such a dire situation (i.e. lack of immediate comparables) and reaffirm the status of valuation as an objective positive (measurement) process, we have to recourse to comparing with the market processes related to development (construction) (Enever, 1995, pp. 121). Let it be acknowledged that a development project (the market-based cost information on which we source from various building cost manuals) is not a match to subject property and is but ...