Holbrook Realty LLC
Holbrook Realty LLC
Robert Holbrook, Holbrook Realty LLCPhone: (972) 672-1431
Email: [email protected]

How the cost approach method is used in real estate

by Robert Holbrook 02/28/2024

How the cost approach method is used in real estate featured image

The cost approach is one of the three main methods used in real estate to calculate the value of a property. Understanding how it works may be beneficial in your next property purchase. 

What is the cost approach method in real estate?

The cost approach method is the comparison of the price a buyer would pay for a property in comparison to the cost of building the same property from scratch. This includes the land value the property sits on, the cost of building materials needed to construct the property and less depreciation. 

When would you use a cost approach?

The cost approach appraisal is often used in the construction of exclusive-use properties. This includes but is not limited to libraries, schools, religious properties and more. 

These building types generally don’t bring in much income, so using the comparable or income approach (two different methods to figure out the value of a property) won’t bring in accurate results. 

The cost approach is often used in new construction, as market value is reliant upon project quality and completion. Each stage of the project is reappraised to allow the release of funds to complete the following steps of the project. 

What is the formula for cost approach real estate?

Cost approach is calculated using this formula: property values = land values plus cost new + depreciation. 

Please note, a low-cost approach appraisal can be a sign of an overactive market, so it’s best to hire a professional advisor when purchasing a new construction or an exclusive use property.

About the Author

Robert Holbrook

Robert J. Holbrook

Broker/Owner, Realtor™

Professional Designations:  CLHMS, CRS, CMA, ALHS, GRI, CRLS, ABR, SRES, ePRO

Headquartered in Plano, Texas, Holbrook Realty serves families with their real estate needs in Texas (#538582), Oklahoma (#170585), Colorado (ER.100038767) and Washington (#27953). Robert Holbrook, the Broker at Holbrook Realty, is also a mortgage broker in Texas and Colorado (NMLS #305616, CO MLO100538188). This additional experience helps our customers navigate the home selling and buying process with confidence and ease.