In the Cost Approach, what is the sequence of steps to determine value?

• A. Determine current replacement cost, then deductions due to depreciation, then add land value
• B. Determine land value first, then replacement cost
• C. Compare to comparable sales
• D. Determine net operating income

Answer: (A)

In the Cost Approach, value is built by valuing the land separately from the improvements and then combining those values after adjusting the improvements for depreciation. You start with the current replacement cost of the improvements (what it would cost to construct a modern, equivalent structure today). Next, you apply depreciation to reflect loss in value due to physical wear, functional obsolescence, and external obsolescence. After you’ve determined the depreciated cost to replace the improvements, you add the land value to arrive at the total property value. This sequence is logical because land doesn’t depreciate in the same way as buildings, and the method isolates the cost of the improvements from the land.

Other approaches, like comparing to sales of similar properties or evaluating income, belong to different appraisal methods and aren’t part of the Cost Approach sequence.