Cost approach

What is the cost approach?

The cost approach is one of the commonly used methods for valuting a property. The cost approach method judges the value of a property based on the hypothetical costs of building an identical structure in the same location.

What data enter into the cost approach?

The cost of a property is comprised of the construction costs on the one hand, and the value of the land on the other. The construction costs include all expenses that would be required to build the same building. The estimated deprecation is then subtracted from the construction costs, depending on the current condition of the real building. The construction costs may be drawn from the official invoice or statement, if available, or they may be estimated based on a typical per-m³ value. The value of the land depends on the area, type, and location of the plot. A big plot of land in a popular location, say, in a quiet neighbourhood near a city centre, will of course be much more expensive than, say, a small plot of land in the countryside right next to a factory. There are two common methods of determining the value of a plot of land in Switzerland: It may either be categorized into a 'class' according to its location, or it may be compared to similar plots that were previously sold (sales comparison).

When is the cost approach used?

The cost approach method can in principle be used to valuate any property. It is, however, most commonly used for buildings with poor market data, as can be the case with remote properties or properties with uncommon specifications.