What does the term “cost approach” refer to in property valuation?

The term "cost approach" in property valuation refers specifically to a method that estimates the value of a property based on the current cost to replace or reproduce the improvements on the property, minus any depreciation. This approach is grounded in the concept that a buyer would not pay more for a property than what it would cost to construct a similar one.

In the context of real estate, this approach is particularly useful for valuing new constructions or properties with unique features where comparable sales data may be limited. By considering the replacement cost, appraisers can derive a value that reflects the cost to build an equivalent structure, while adjusting for any physical, functional, and economic depreciation that the property may have experienced over time.

Other methods mentioned, such as using recent sales data or focusing on projected income, pertain to different valuation approaches like the sales comparison approach and the income approach, respectively. These approaches serve specific circumstances but do not align with the concept of estimating property value based solely on replacement cost, which is central to the cost approach.