Cost Approach Appraisal Calculator

REPLACEMENT COST NEW (RCN)

-- or calculate from size --

Enter RCN and effective age to see the cost approach calculation.

What the cost approach is

The cost approach estimates value as the sum of the site value plus the depreciated cost of the improvements (the building). It answers the question: what would it cost to replace this building with an equally useful substitute, minus the loss in value from all forms of depreciation?

When it is most reliable

The cost approach is most reliable for new construction (little depreciation), special-use properties with few comps, and properties with unique improvements. It is required by FHA and VA for new construction and is often given significant weight on insurance appraisals and property tax appeals.

Physical depreciation

Physical deterioration is the loss in value from wear and tear, age, and deferred maintenance. Appraisers estimate it using the age-life method (effective age / total economic life) or by measuring specific conditions requiring cure.

Functional and external obsolescence

Functional obsolescence is a loss in value from outdated design, poor layout, or inadequate utilities (e.g., a one-bathroom house in a two-bath market). External obsolescence (also called economic obsolescence) comes from factors outside the property boundary -- nearby industrial uses, traffic, or market-wide economic decline.

When is the cost approach used in an appraisal?

The cost approach is used when there are few comparable sales (special-use properties), for new construction, for insurance valuations, and when required by the lender or client. For typical residential properties, the sales comparison approach usually carries more weight, but appraisers still develop the cost approach as a check on reasonableness.

What is replacement cost new?

Replacement cost new (RCN) is the cost to build a functionally equivalent substitute structure using current materials and methods at current prices. It differs from reproduction cost (identical replica). Appraisers use cost services like Marshall and Swift to estimate RCN per square foot based on construction quality and region.

What is functional obsolescence?

Functional obsolescence is a loss in value caused by a feature of the property itself that makes it less competitive in the current market -- such as poor floor plan, inadequate bedroom-to-bath ratio, low ceiling heights, or outdated mechanical systems. It may be curable (cost to fix is less than the value added) or incurable.