Effectiveness & Limitations of the Cost Approach

The cost approach to calculating appraisal value for land and property can be extremely effective in certain situations.  However, the cost approach does have limitations.

Effectiveness of the Cost Approach

For new construction, the cost appraoch can be uniquely instructive.  If the project is newly completed, then the contractor's line item lists of costs for labors and materials and indirect costs will be accurate.  Accordingly, it may be an extremely accurate estimation of market value.

 

Using the cost approach is most appropriate where the sales comparison approach cannot be utilized because of a lack of comparable data on comparable sales or rentals.

 

Furthermore, the cost approach is appropriate for use where the subject property is a special use building such as an oil refinery, museum or church.

Limitations of the Cost Approach

A major limitation of the cost approach is that it does not reflect the forces of supply and demand.

 

Further, when the degree of depreciation for the subject property is high and cannot be quantified with reliability, the results obtained from the cost appraoch are vulnerable to scrutiny and may not be reliable.