What does the cost approach to value primarily consider?

The cost approach to value primarily focuses on determining what it would cost to replace a property, accounting for current construction costs and any depreciation that affects its value. This approach is particularly useful for appraising new constructions, unique properties, or in situations where comparable sales data may be scarce or unavailable.

When applying the cost approach, appraisers evaluate the cost to build a replica of the property (reproduction cost) or a similar one (replacement cost), and then subtract any accrued depreciation to arrive at a value estimate. This method emphasizes the intrinsic worth derived from the physical construction and condition of the property, rather than market forces or income potential.

In comparison, comparative market analysis examines recent sales of similar properties to establish market value, while potential rental income looks at income-generating potential, often used in the income approach. Adjustments for economic factors pertain to broader market influences that may affect property values. However, these considerations fall outside the specific scope of the cost approach. Therefore, recognizing construction costs and depreciation as the key elements drives the validity of this method in property valuation.