Sources of Cost Information for Real Estate Valuation

Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

This lesson examines the cost approach method of real estate valuation and the basic process involved. We will discuss standard sources for cost information and suggestions for their application.

Overview of the Cost Approach to Real Estate Valuation

To determine an accurate value for a parcel of real estate with improvements, an appraiser needs to follow The Appraisal Foundation's Uniform Standards of Professional Appraisal Practice (USPAP).

The primary purpose of the cost approach method is to determine the replacement value of a specific set of real estate with improvements. This valuation is then used to ensure a buyer does not pay more than the replacement cost for the real estate and its improvements.

Colton, a new real estate appraiser, is focusing on the cost approach to real estate valuation. Colton needs to separate out the costs for the various items that are included in the set. In other words, he has to figure out the value of the site as separate from any buildings, parking lots, or other structures that have been added on.

Sources of Cost Information - Actual Costs

Finding sources for the cost of replacing either a parcel of real estate or the components used in building an improvement can be complicated. One avenue to research is the actual costs of the parcel and its improvements.

Colton examined public records about the parcel in question and was able to build a history of the past sales price for the site. From that information, he learned the name of company that had built the three story office building and parking lot.

Colton found the building and parking lot had been constructed in 1990, and the original company was no longer in business. He was unable to obtain records of the actual costs of construction for those improvements. In addition, the fact that the improvements were twenty-seven years old meant that the costs would not accurately reflect the replacement value of comparable items in the present.

Sources of Cost Information - Market Extracted

To determine the replacement costs of the building and parking lot, Colton looked at using market-extracted information. In the event that actual costs cannot be located, an appraiser can determine a modern day replacement cost using comparable improvements.

For example, Colton needs to determine the replacement cost for a three-story office building in downtown San Antonio. He looked at comparable buildings for sale as a starting point and was able to talk with some local construction companies about the cost to build versus the sales price.

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