Property Valuation: Cost Approach Method
Like any property, commercial real estate value is difficult to appraise.
Lenders, underwriters, insurance carrier valuation tools and third party appraisal companies all have their own methodology for coming up with a value for a property. They’re complex strategies, no doubt. But, even more complex is determining who will give you the most accurate value? Thanks to Investopedia, we’ve gotten down to the bottom of one of the many approaches used for new-and-improved property.
The Cost Approach
This approach estimates the value of properties that have been improved by other buildings. It’s required to have separate estimates of value for the building and land, which are then added together to calculate the value for the entire property. This method assumes that the buyer would not pay more for an improved, existing building than it would cost to build one from scratch. The cost approach is most commonly used for property that is not frequently sold, such as a school or church.
The basic steps of cost approach real estate evaluation include:
- Estimate the value of the land imagining it vacant
- Estimate the current cost of constructing the building and site improvements
- Estimate the amount of depreciation of the improvements
- Deduct the depreciation from the estimated construction costs
- Add the estimated land value to the depreciated cost of the building and improvements
Once you’ve completed those five steps, you’ve determined the total property value! Voilà! Easy, right?
The main issue here is not your arithmetic skills, but rather who you chose to do the math for you. Who can you really trust to give you the most accurate value?
Contact an Assurance representative today and let us lead you to the right value for your property.
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