The cost approach was historically a part of most commercial property valuations prepared. However, the pangs of conscience, including the cost approach (if it was not relevant) reduced over the past 20 years.
The principle of substitution is the technical basis for using the cost approach. According to the principle of substitution, a prudent buyer would not pay more than the cost to build such a property. In other words, you would not spend $ 2 million to buy a new apartment complex, where they could build it for 1.5 million.
The cost approach is the sum of the market value of the property, its depreciated replacement cost and entrepreneurial efforts. Country is usually using the sales comparison approach. The replacement is the cost to build a building of the same quality and functional utility as the subject property.(. Reproduction, the cost to duplicate build an accurate, this approach is sometimes built for old buildings and using materials or types of craft is not currently used.)
External obsolescence occurs when circumstances outside the boundaries of the subject property a negative impact on its value. For example, an office building in New York from an external obsolescence would suffer if Manhattan office occupancy fell from 93% to 75%. A mansion built next to a slaughterhouse is another example of external obsolescence.