In the cost approach, what is the first step?

In the cost approach, what is the first step?

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

Answer: (A)

In the cost approach, you start by valuing the site because land value is separate from the building and does not depreciate. Establishing the site value first provides the base you’ll add to later. After you have the land value, you estimate the replacement cost of the building to know how much it would cost to recreate the structure today. Next, you assess accrued depreciation to reflect aging, wear, and obsolescence of that building. Finally, you combine the site value with the depreciated building cost to arrive at the property’s market value. The other steps aren’t done first: replacement cost follows after land value, depreciation is calculated on the building after its cost is known, and the final calculation adds the site value to the depreciated building cost rather than to total depreciation.

In the cost approach, you start by valuing the site because land value is separate from the building and does not depreciate. Establishing the site value first provides the base you’ll add to later. After you have the land value, you estimate the replacement cost of the building to know how much it would cost to recreate the structure today. Next, you assess accrued depreciation to reflect aging, wear, and obsolescence of that building. Finally, you combine the site value with the depreciated building cost to arrive at the property’s market value. The other steps aren’t done first: replacement cost follows after land value, depreciation is calculated on the building after its cost is known, and the final calculation adds the site value to the depreciated building cost rather than to total depreciation.