What does the cost approach in property valuation entail?

The cost approach in property valuation focuses on determining the value of a property by estimating the cost to replace or reproduce the structure on the property, alongside the value of the land itself. This approach combines two key components: the current cost to build a similar structure (based on current materials and labor costs) and the value of the land on which the property exists.

This method is particularly useful for valuing new constructions, unique properties, or properties where comparable sales data is insufficient. By calculating the replacement cost and adding it to the land value, the cost approach provides a direct measure of a property's worth, independent of market conditions or the income it generates. It emphasizes the principle that a rational buyer would not pay more for a property than it would cost to create a similar one.

The other methods listed involve different valuation strategies. Assessing sale prices of similar properties relates to the comparable sales approach, which measures value based on market activity. Evaluating market demand focuses on the economic factors affecting property prices, often seen in income and investment valuations. Calculating the income generated from the property relates to the income approach, which analyzes the return on investment a property can produce.