What does the Cost Approach in property valuation estimate?

The Cost Approach in property valuation primarily estimates the cost to replace or reproduce a property, adjusted for any depreciation that has occurred. This method is grounded in the principle that a buyer will not pay more for a property than it would cost to create a similar one without any existing structures.

In this approach, appraisers will first determine the current cost of constructing the property and then deduct depreciation resulting from physical deterioration, functional obsolescence, or external obsolescence. This results in a value that reflects not just the initial investment made in the property but also a realistic appraisal considering its current condition.

The focus on replacement or reproduction costs allows this approach to be particularly useful for properties that are new or where there are few comparable market transactions. It offers a tangible assessment based on concrete data rather than speculative or market-driven analyses.

In contrast, the other options incorporate different methods of valuation. For instance, estimating the average market price typically aligns with the Sales Comparison Approach, while gauging future income potential corresponds to the Income Approach. The total investment return relates more to investment analysis rather than direct property valuation metrics utilized in the Cost Approach.