Which formula is used for estimating value using the cost approach?

The formula used for estimating value using the cost approach focuses on determining the value of a property based on the cost to reproduce or replace the structure, while also considering the depreciation that may have occurred over time. In this context, the cost to reproduce refers to the current costs associated with constructing a building that is identical or substantially equivalent to the existing structure.

By subtracting depreciation, which accounts for factors like physical wear and tear, functional obsolescence, and external economic conditions that affect the property’s market value, and then adding the land value, this formula arrives at a more accurate estimate of the property’s overall value. Essentially, it reflects the principle that the value of a property can also be seen as the sum of the land value and the cost of the improvements made, adjusted for any loss in value due to depreciation.

This approach is particularly useful for new constructions where the cost of building is readily available and where the land and property improvements are distinctively defined. It is a common valuation method used by appraisers and real estate professionals when assessing properties that are not easily compared to others in the market.