ENMETHODOLOGY · COST
Cost approach: land, replacement and depreciation
Acquisition cost, renovation cost and the cost approach are different concepts. The method estimates land plus the depreciated value of improvements.
The core equation
Indication of value = land value + replacement cost new − depreciation. Replacement cost describes equivalent utility using current materials and standards, not necessarily an exact replica.
Three forms of depreciation
Physical deterioration concerns age and condition. Functional obsolescence concerns poor layout or outdated systems. External or economic obsolescence comes from factors outside the property.
- Physical deterioration
- Functional obsolescence
- External or economic obsolescence
Where it is most useful
It is most relevant for new, specialized or thinly traded properties and as a check on other approaches. Land value and depreciation are often the weakest inputs.
Sources and further reading
Curated primary standards, official guidance and foundational research. Source register reviewed 31 August 2026.
- IAAO — Standard on Automated Valuation Models (2018)AVM principles, data management, quality assurance and the cost approach.
- IAAO — Standard on Mass Appraisal of Real Property (2023)Model specification, calibration, data quality and out-of-sample testing for mass appraisal.
- TEGOVA — European Valuation Standards — 10th edition (2025)European framework for Market Value, reports, methodology and energy efficiency.