Cost Approach or Contractor’s Approach

The cost approach is like figuring out how much a car is worth. Imagine you want to buy a car, but you’re not sure how much it should cost. One way to figure this out is by thinking, “How much would it cost to buy a brand-new car just like this one?” You wouldn’t pay more than what a new one costs, right? That’s because you could just buy a new one instead of an old one. Now, let’s say the car you’re looking at is a little worn out—it might have scratches or missing parts. So, you take the price of a brand-new car and subtract some money because of the scratches and damage. That gives you the price of the car as it is now. This is how the cost approach works for houses and buildings. It looks at how much it would cost to build a brand-new one, and then subtracts some value if the building is old or damaged, to give the current value.