What calculation approach estimates the cost to replace a building and adjusts for depreciation?

The cost approach is a method used to estimate the value of a property by determining the cost to replace the building, then adjusting that value for depreciation. This approach is particularly useful for properties that do not frequently transact in the market or for unique properties where comparable sales data may not be available.

In this approach, an appraiser first calculates the total cost it would take to construct a similar property with similar utility, factoring in direct costs (such as labor and materials) and indirect costs (such as permits and fees). Once the replacement cost is established, adjustment for depreciation is applied, which accounts for factors such as wear and tear, economic obsolescence, or functional obsolescence. This results in a more accurate estimation of the property value considering its current condition and age.

In contrast, the income approach focuses on the income-generating potential of the property and is often used for investment properties. The market approach relies on comparable sales data to estimate property value based on similar properties' selling prices. The project comparison method is similar to the market approach but may involve comparing the costs and features of projects rather than completed sales, making it less applicable for replacing and depreciating the value of an existing building.