The cost approach is a property valuation method that estimates value based on what it would cost to replace your building, minus depreciation, plus land value. It's one of three standard approaches appraisers use (along with sales comparison and income approaches).
The formula: Land Value + (Replacement Cost - Depreciation) = Property Value
Appraisal districts often use the cost approach for newer homes, unique properties, and buildings where comparable sales are limited. It's particularly common for commercial and industrial properties.
Understanding how your property was valued helps you challenge it effectively. If the appraisal district used the cost approach, potential errors include:
• Overstated replacement costs
• Understated depreciation
• Incorrect land values
• Missing functional obsolescence (outdated floor plans, etc.)
At your protest, you can challenge any of these inputs. But the strongest argument is usually comparable sales showing actual buyers paid less than the cost approach suggests.
An appraisal district values a 5-year-old home using the cost approach:
Land value: $100,000
Replacement cost: $250,000 (cost to build same home today)
Depreciation: $25,000 (5 years of wear at 2% per year)
Cost approach value: $100,000 + ($250,000 - $25,000) = $325,000
If comparable sales show similar homes selling for $300,000, you could argue the cost approach overvalues your property and request reduction to match market evidence.
The cost approach is common for new construction, unique properties, and special-use buildings where comparable sales are scarce. It's also used as a secondary check on values derived from sales comparisons.
Depreciation accounts for the loss in value due to age, wear, and obsolescence. A 20-year-old home isn't worth the same as an identical new home. Depreciation adjusts for this difference.
Yes. You can argue that replacement costs are overstated, depreciation is understated, or that comparable sales prove the cost approach result is too high. Market evidence typically trumps cost calculations.