Cost Approach
I
n
real estate appraisal, the cost approach is one of three basic
valuation
methods.
The others are market, or sale comparison, and income. The
fundamental premise
of the cost approach is that a potential user of real estate won't,
or shouldn't, pay more for a property than it would cost to build an
equivalent. The cost of construction minus depreciation,
plus land, therefore
is a limit, or at least a
metric,
of market value.
T
here
are some fairly
large
assumptions
embedded
here. One of the basics is that there is a
sufficient supply
of buildable
land
that construction is a viable
alternative to purchase of an
existing property.
A related question is whether the building in question is anything
that would actually be built again in that market. If the trend of
development favors, say, high volume warehousing,
would anyone consider building a multi-story manufacturing facility?
If the trend is to high density
condominium
buildings, would anyone consider building a detached house? The cost
of constructing of obsolete building isn't considered relevant to
market value.
There are other methodological issues which can be problematic. How do you estimate cost? Is it based on reproduction of an exact replica or something that is judged to be functionally equivalent? Can you even estimate cost very exactly? When a project is put up to bid, is there not usually a range of prices offered for the same plans and specifications? Is the final cost of a project equal to the original bid? How should profit be treated? Some maintain that the cost approach will normally be the highest of the three approaches.
Черкаський політехнічний технікум Для студентів III курсу, група ОД
Text № 4. Викладач Кособокова А.В.
Word List:
1. |
valuation method |
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2. |
premise |
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3. |
depreciation |
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4. |
therefore |
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5. |
a metric |
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6. |
fairly large |
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7. |
assumptions |
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8. |
to embed |
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9. |
a sufficient supply |
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10. |
buildable land |
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11. |
viable |
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12. |
an existing property |
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13. |
warehousing |
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14. |
density |
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15. |
condominium |
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16. |
to estimate |
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17. |
reproduction |
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18. |
replica |
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19. |
the original bid |
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20. |
a range of prices |
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