Monday, May 9, 2011

The Cost Approach

Professional Activities: The Cost Approach

Written By: Kellie Nation Adolph

The appraising process is a major function within the realm of professional real estate activities. Without it, corresponding parties in a transaction of buying or selling a home would have no way of knowing how much their property is valued at, or where that number stemmed from. The job of an appraiser can be a tedious one depending upon the type of property it is, as well as whether or not all eight steps of the prescriptive appraisal process are necessary. Within this process, there are three basic methods that an appraiser may use when estimating real estate value: the cost approach, sales comparison approach, and the income approach. In most cases, one method may be more appropriate than another in order to achieve the most accurate, sensible value for either a piece of residential, commercial, industrial or agricultural property. One technique worthy of further discussion that can be relevant with any property type is the cost approach, and within the approach are three subsets: the quantity survey method, the unit-in-place method, and the square foot method (Pinal County).
quantity surveyor training

The underlying principle of the cost approach notes that a potential user of real estate should not pay more for a property than it would cost to build a comparable. Therefore, the cost of construction less depreciation, plus land, is a reasonable measurement of market value when matching the property to an analogous subject (Marshall and Swift). The approach takes into consideration the costs of either reproduction or replacement. The first subset of the cost approach, although the least commonly used by appraisers, is the quantity survey method. This process takes into consideration every single cent used to either reproduce or replace a comparable piece of property including labor, material, equipment, overhead, and any other incurred fees (Pinal County). This is certainly the most time consuming routine for an appraising concluding to the fact that it is not often conducted. An appraiser will not use this method unless specifically requested; however, a client who would most likely call for this method is a contractor looking to bid a job. The contractor would distribute the blueprints of a potential project to a subcontractor who would then use the data gathered under this method and factor in the small elements (Rattermann).
Builder & Framing

The second subset of the cost approach is the unit-in-place method, which is far less lengthy than the quantity survey method, but still very accurate. The fundamentals surround its replacement costs of the most basic, major features of the property, like the building walls. Each element per square foot is added up and then multiplied by the entire area of the property to estimate the cost of rebuilding the item(s) altogether (RealEstateAgent). With the unit-in-place method, the appraiser is able to make adjustments for individual components of different property types and the structures within them (Marshall and Swift). Other housing components that this subset may consider are the floors, ceilings, roofs, windows, and foundation. Like the quantity survey method, this technique is only used if specifically requested, and typically, the appraiser would hire a cost estimator to assist with the process (Rattermann).

Home Blueprint

The third technique within the cost approach is the square foot method. Under this process and similar to the quantity survey method, every possible cost is considered; however, instead of concluding to a grand total for the whole property, it is priced out per square foot. Therefore, the cost estimated using the square foot method depends on the total area of the property (Pinal County). Generally, this process is not considered to be as accurate as the quantity survey method, nor the unit-in-place method, because the scope of work is typically too broad in order to determine the most precise price to reproduce or replace a comparable property (Marshall and Swift). This method is common among appraisers who would like further assistance in estimating the cost of construction. Assessors and insurance agents would also use this technique to gather data on the dollar-per-square-foot estimates (Rattermann).

Although the cost approach is used more widely with residential properties than any other type, the method is still very accepted in the others because it breaks all components down financially, which is favorable to builders and investors because their concerns deal with exactly how much money needs to be paid. Moreover, there is not necessarily a more right or wrong method, or subset of the cost approach, but one process may result in a more accurate, comparable market value to that of a subject property. The cost approach is one that appraisers must always take into consideration, even if the sales comparison and/or income approach suit better for one particular piece of property.


Marshall and Swift. The Cost Approach. 2006.

Pinal County. The Cost Approach. 2011.

Rattermann, Mark R. The Student Handbook to the Appraisal of Real Estate, 13th Edition. Building Cost
Estimates. 2009. P.256-57. Unit in Place Method. 2011. glossary/Realestate/Unit-in-place-method.html

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