Cost Approach


DEFINITION of 'Cost Approach'

A real estate valuation method that surmises that the price someone should pay for a piece of property should not exceed what someone would have to pay to build an equivalent building. In cost approach pricing, the market price for the property is equivalent to the cost of land plus cost of construction, less depreciation. It is often most accurate for market value when the property is new.

BREAKING DOWN 'Cost Approach'

Cost approach is one of three popular valuation methods for real estate, the others are the income approach and the comparables approach. The cost approach methodology requires certain assumptions, such as the availability of land. If land is not available to build on then it is not possible to substitute existing property. Additionally, the method does not address whether an exactly equivalent structure must be built is to be built, or what if the cost of an equivalent building can be effectively estimated.

  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Comparables

    A valuation technique in which a recently sold asset is used ...
  3. Valuation

    The process of determining the current worth of an asset or company. ...
  4. Appraisal

    A valuation of property (ie. real estate, a business, an antique) ...
  5. Private Equity Real Estate

    A Definition of "Private Equity Real Estate" and how it applies ...
  6. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
Related Articles
  1. Home & Auto

    5 Mistakes Real Estate Investors Should Avoid

    Don't let a slow real estate market drag you down - steer clear of these pitfalls.
  2. Home & Auto

    The Truth About Real Estate Prices

    Historical housing price data suggests ongoing increases in housing prices, but these numbers don't tell the whole truth.
  3. Home & Auto

    Closing A Real Estate Deal In A Down Market

    We provide top tips on how to help sell your home in a rough market.
  4. Home & Auto

    How To Assess A Real Estate Investment Trust (REIT)

    Find out why funds from operations is a superior measure of REIT performance.
  5. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  6. Retirement

    Using Your IRA to Invest in Property

    Explain how to use an IRA account to buy investment property.
  7. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  8. Home & Auto

    Economics of Owning a Rental Property

    Learn how to find suitably priced rental property and the right rent level. Determine what maintenance costs to expect and what tax breaks are available.
  9. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  10. Home & Auto

    Should You Buy A House At Auction?

    In theory, many of the best properties are auctioned. But auctioned properties aren’t always hidden gems.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center