When the cost approach is necessary for credible assignment results, the appraiser must:
(i) develop an opinion of site value by an appropriate appraisal method or technique;
(ii) analyze such comparable cost data as are available to estimate the cost new of the improvements (if any); and
(iii) analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation) (See USPAP Standards Rule 1-4(b).
Determining value by the cost approach
Improvement Replacement Cost
Resources may include:
- Builder estimates and costs
- Marshall & Swift
- All cost resources must be documented
- External Obsolescence
Contributory Value of Improvements = Replacement Cost - Depreciation
When is the cost approach not appropriate to use?
- Significantly older improvements may make depreciation difficult to accurately estimate.
- Effective age is a good indicator as to whether cost approach is appropriate.
- When improvements do not represent the highest and best use of the land as though vacant.
- When relevant comparable cost data is lacking or too diverse to indicate entrepreneurial profit.
- In an appraisal for investment purposes, it is not appropriate since the time to develop and construct must be considered.
Common issues seen in the cost approach
- Cost approach not developed properly (fabrication of cost data).
- Unfamiliarity with cost manuals.
- Inapplicable and/or unsupported “canned comments” such as: “Cost approach is irrelevant”; “Costs are not accurate”; “Not applicable as an indicator to value”; or “Not required”.
- Just because the cost approach isn’t required, does not mean that it can’t be performed, or shouldn’t.
- No support for: Replacement costs; Economic life and effective age; or Site value estimate.