Beyond its use as independent method to determine property value, the cost approach presents a highly effective way to verify market and income-based valuations, project construction costs and adjust estimates to account for unique physical property features.

As an independent valuation method
An essential valuation method, the cost approach is crucial to various appraisal assignments, including when appraising new or proposed construction, when lack of market activity limits the effectiveness of the sales comparison (market) approach, when land value is well supported, when improvements represent the best use of land, and for special purpose or specialty properties not frequently exchanged.

Develop an opinion of market value
Based on the reasoning that a buyer will not pay more than what it would cost to reproduce or replace the subject property, the cost approach enables the appraiser to develop an opinion of market value based on the current costs of labor, materials, related fees, and any entrepreneurial profit or incentive. Marshall & Swift provides the cost data needed to determine this value.

Prevent inaccurate appraisals and monitor local real estate markets
Today's real estate market presents unique challenges to both the sales comparison and income approach. Overinflated markets often lead to inaccurate valuations that misrepresent the subject property.

When verifying sales comparison estimates, the cost approach is an excellent way to identify a runaway or rapidly declining market. For example, if the cost approach comes in well below market prices, it may be a signal that the market is raising beyond sustainable levels. On the other hand, if the cost approach comes in significantly above the market, it may signal that market prices have dropped below reasonable levels.

To read more about the importance of the cost approach in maintaining realistic values, download "How the Cost Approach Shines the Light on a Troubled Market."