What statement best describes the primary purpose of the cost approach in real estate valuation?

What statement best describes the primary purpose of the cost approach in real estate valuation?

• A. To estimate value by adding land value to the depreciated cost of improvements.
• B. To estimate value based on recent sales of comparable properties.
• C. To project future income streams and discount them to present value.
• D. To determine the replacement cost of land only.

Answer: (C)

The key idea is valuing a property by what it would cost to replace or reproduce the improvements today, plus the value of the land, and then account for depreciation. The cost approach estimates value by calculating the current replacement (or reproduction) cost of the structure, subtracting depreciation for age and condition, and adding land value. This method reflects what it would cost to build a similar property today and is especially useful when there are few comparable sales or for unique or new properties. It differs from approaches based on sales comparisons or on income projections: the former uses recent market sales of similar properties, and the latter converts expected future income into present value.

The key idea is valuing a property by what it would cost to replace or reproduce the improvements today, plus the value of the land, and then account for depreciation. The cost approach estimates value by calculating the current replacement (or reproduction) cost of the structure, subtracting depreciation for age and condition, and adding land value. This method reflects what it would cost to build a similar property today and is especially useful when there are few comparable sales or for unique or new properties. It differs from approaches based on sales comparisons or on income projections: the former uses recent market sales of similar properties, and the latter converts expected future income into present value.