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The third approach to figuring out what a property is worth is the cost approach, which appraisers seldom use these days. The theory behind it is this: The value of a property is whatever it costs to construct a new one in addition to the cost of the land.

The cost approach is best when the property is new or almost new. For older properties, because you can buy properties for much less than it costs to build a new property, appraisers are likely to use this approach.

To apply the cost approach in valuing a building, you must first figure out what the value of its land would be. This is typically done via a sales comparison approach (see the section “Approach #1: Comparable sales,” earlier in this chapter). Then you have to determine what it will cost to construct, reproduce, or replace the building in question as if you were doing it from scratch. Be sure to allow for accrued depreciation and obsolescence of the building.

You end up with a property value calculation of

Land value + building cost – depreciation = estimated property value