appraisals you can trust

Appraising 101:


The Cost Approach

The Cost Approach estimates the cost of reproducing your home on the same site given current construction costs, and then depreciates it for aging and other factors.  This approach works well for relatively new homes, but it can be difficult to determine how much depreciation has actually occurred in older homes. 


Even brand new homes can have some depreciation.  If a home is drastically overbuilt for an area it is unlikely that the owner of that homes is going to recover the full cost of construction, even for a new home.  Take the luxury home market, for example.  Billionaire A spends $10 million building his dream home, then decides to sell it.  He puts it on the market for $10 million, figuring that's a fair price since it's what he put into the home. 


The problem is that his dream home happens to be lime green throughout, except for the purple kitchen.  It has an Olympic sized curling facility which takes up a significant chunk of the back yard, and it only has one bedroom.  Sure, it cost $10 million to build, but no one else is going to pay him $10 million for it. 


This kind of overbuilding is called "functional obsolescence," and it is factored into the depreciation of the home in the Cost Approach.