What does the Cost Approach to value estimate?

The Cost Approach to value primarily estimates the value of a property by focusing on the cost to replace or reproduce improvements, taking into account the depreciation that has occurred. This method is grounded in the idea that a buyer would not pay more for a property than it would cost to construct a similar one. It involves assessing the current cost of building an equivalent structure (either at current market prices or at the original construction costs) and then subtracting any depreciation related to physical wear and tear, functional obsolescence, or external obsolescence. This approach is particularly useful for new constructions or special-use properties where comparable sales data may be limited or not applicable.

In contrast, other methods like the market approach rely on buyer preferences and comparable sales, while the income approach focuses on the potential earnings from rental properties. These alternatives may serve other valuation needs but do not encapsulate the specific methodology and rationale behind the Cost Approach.