There are various techniques and approaches used by appraisers to determine the value of a property. One of these approaches, which is based on the current construction price, is essential to understand the dynamics in areas with high construction activity.

Key points

• What is the “Cost Approach”? It is a valuation methodology that focuses on determining how much it would cost to build an identical property under current market conditions.
• Different Valuation Approaches: There are various methods to value a property, some of them are:
  • Income approach: It is NOT applicable in this case. It is based on the potential income that a property can generate.
  • Comparative sales approach: NOT the correct one here. It focuses on comparing the property in question with other similar properties that have recently sold.
  • Construction approach: Despite its name, it is NOT the method we are addressing.
  • Cost approach: YES is the approach in question. Estimate the value of the property based on the cost of building a similar property under current conditions.
• Applicability of the Cost Approach: The “Cost Approach” is particularly useful in areas where there is high construction activity, as it is based on current construction and material costs.

Conclusion

Understanding the different valuation approaches is essential for those involved in the real estate sector. The “Cost Approach” offers a perspective based on the current cost of reconstruction, being an invaluable tool in areas with relevant construction dynamism.