In the cost approach, what is the second step?

In the cost approach, what is the second step?

• A. Add value of site to total depreciation to equal market value
• B. Estimate value of site
• C. Estimate the replacement cost of the building
• D. Estimate the accrued depreciation of the building

Answer: (C)

In the cost approach, you build value by separating land and the building and using current costs, then making adjustments for depreciation. The process starts with valuing the site, since land value is independent of the building and doesn’t depreciate the same way. The next step is to determine the replacement cost of the building, which is the amount it would cost today to construct a building with the same utility. This replacement cost provides the building’s current-cost basis before any wear or obsolescence is accounted for. After that, you estimate depreciation to reflect physical deterioration, functional obsolescence, and external factors, subtracting it from the replacement cost to arrive at the depreciated building value. Finally, you add the site value to that depreciated building value to obtain the property's total estimated market value.

In the cost approach, you build value by separating land and the building and using current costs, then making adjustments for depreciation. The process starts with valuing the site, since land value is independent of the building and doesn’t depreciate the same way. The next step is to determine the replacement cost of the building, which is the amount it would cost today to construct a building with the same utility. This replacement cost provides the building’s current-cost basis before any wear or obsolescence is accounted for. After that, you estimate depreciation to reflect physical deterioration, functional obsolescence, and external factors, subtracting it from the replacement cost to arrive at the depreciated building value. Finally, you add the site value to that depreciated building value to obtain the property's total estimated market value.