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The cost approach is a real estate valuation method which estimates the replacement cost of a property by:
- A. adding the cost of land and the cost of reconstruction at the current
cost. - B. subtracting the current cost of reconstruction from the cost of the land.
- C. discounting the net operating income at the cap rate.
- A. adding the cost of land and the cost of reconstruction at the current
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The correct answer is A.
The premise of the cost approach is that a potential user of real estate shouldn’t pay more for a property than it would cost to build an equivalent. The cost approach estimates the replacement cost of a building by adding the cost of the land to the current cost of reconstructing the building.
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