Casa Academy

Reviewed by Casa Academy and updated July 29, 2026 using the current DBPR checklist and Pearson VUE scheduling guidance.

Cost Approach

The cost approach estimates property value by adding land value to the depreciated replacement cost of improvements, reflecting what it would cost to rebuild the structure minus accrued depreciation plus site value.

Exam context

Apply cost approach when the question mentions new custom homes, churches, or schools with limited comps. Remember depreciation reduces improvement value; land is not depreciated for appraisal purposes.

Formula and steps

Appraisers estimate land value as if vacant, calculate replacement or reproduction cost of the building, subtract physical, functional, and external depreciation, then add land value back. The approach assumes a buyer would not pay more than the cost to create a substitute of equal utility.

Best use cases

New construction, special-purpose properties, and insurance valuations rely on the cost approach when few comparable sales exist. Residential appraisals often weight the sales comparison approach highest but reconcile all three approaches in the final value opinion.

Examples

  • New custom residence

    An appraiser values a six-month-old home by estimating $120,000 land plus $450,000 replacement cost minus $15,000 physical depreciation for minor wear.

  • Special-purpose warehouse

    A cold-storage facility with no recent sales nearby is valued primarily through cost approach adjusted for functional obsolescence of outdated refrigeration.

Keep studying

Practice cost approach questionsEnroll in pre-licensing

Related terms

Related resources

Sources