COST APPROACH

A real estate valuation method that surmises that the price a buyer should
pay for a piece of property should equal the cost to build an equivalent
building.
In cost approach appraisal, the market price for the property is equal to the
cost of land, plus cost of construction, less depreciation.

THE COST APPROACH FORMULA:

Property Value = Land Value + (Cost New – Accumulated Depreciation)
Or
C–D+L=V
C – Improvement costs
D – Depreciation
L – Land value
V – Property Value

COST APROACH TO VALUE (key steps)

1. Cost of building
2. Apply depreciation
3. Value of land
4. Add the land
 i. Cost of Building
Example:
Living area – P80/sq. ft. x 1100 sq. ft. = P88,000
Garage – P40/sq. ft. x 400 sq. ft. = P16,000
Utility – P50/sq. ft. x 100 sq. ft. = P5,000
Patio – P20/sq. ft. x 150 sq. ft. = P3,000
-----------------
= P112,000

ii. Apply Depreciation

Example:
50 years = economic life of the property
10 years = age of the property

10/20 = .20 or 20% (depreciation)

P112,000 x .20 = P22,400 (accrued depreciation)
P112,000 – P22,400 = P89,600 (depreciated value)

iii. Value of Land

Example:
Land – 120 ft. x 150 ft. = 18,000/sq. ft.
The land cost P10 per square ft.

18,000/sq. ft. x P10/sq. ft. = P180,000

iv. Add the Land

Example: P180,000 + P89,600 = P269,600