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Simple English definitions for legal terms
cost approach
Read a random definition: private letter ruling
A quick definition of cost approach:
The cost approach is a way to figure out how much a property is worth by calculating how much it would cost to build a similar property from scratch. This method assumes that a buyer would not pay more for a property than it would cost to build a new one with the same usefulness. It is one of three common methods used to appraise real estate, along with the market approach and income approach.
A more thorough explanation:
The cost approach is a method used to appraise real property. It is based on the cost of building a new structure with the same usefulness as the property being appraised. The assumption is that an informed buyer would not pay more for the property than it would cost to build a new structure with the same usefulness.
For example, if a property is being appraised and it would cost $500,000 to build a new structure with the same usefulness, then the property would be valued at $500,000 or less. This is because an informed buyer would not pay more than the cost of building a new structure.
Another example would be if a property has a building on it that is in poor condition and would cost $200,000 to repair or replace. The value of the property would be based on the cost of repairing or replacing the building, not on the value of the land or the potential income the property could generate.
The cost approach is one of three methods used to appraise real property, along with the market approach and income approach. It is often used for properties that are not income-producing, such as single-family homes or vacant land.