Which aspect is definitely considered in the cost approach?

The cost approach in property valuation is primarily centered around the principle of substitution, which states that a buyer will not pay more for a property than it would cost to construct a similar one with the same utility. Therefore, the reconstruction costs minus depreciation are fundamental to this approach.

In the cost approach, an appraiser first calculates the cost to replace or reproduce the improvements on the property. This is done by estimating the costs associated with building a similar structure using today’s prices for materials and labor. From this total, depreciation—reflecting the property’s current condition, age, and any functional or economic obsolescence—is deducted. The resulting figure represents the estimated value of the property based on its construction costs adjusted for depreciation.

By focusing on the reconstruction costs minus depreciation, this approach ensures that the valuation reflects the true economic worth of the property as it stands today, taking into account both the cost to build anew and how the property’s value has altered over time due to wear and tear or market factors. This makes it a critical consideration in accurately applying the cost approach in property assessments.