Cost Approach to Value
COST APPROACH TO VALUE
Basic steps in the cost approach are:
* Estimate the value of the land as if vacant
* Estimate the replacement cost new of the improvements
* Estimate the loss in value from all forms of depreciation
* Deduct the total amount of depreciation from the replacement cost new
* Estimate the same amount for any other improvements
* Add the land value estimate to the depreciated cost value to arrive at the total property value
Land valuation is accomplished through six generally accepted procedures:
Direct Sales: Recent sales of similar vacant parcels are compared with the subject property. Adjustments are made for differences among the properties and are used to create indicators of value for the land under appraisal. The sales comparison approach is the most reliable method of land valuation. Reliable sales data is not always available. The assessor must then rely on other methods of land valuation.
Allocation: This method is based on the principle of balance, which states that there is a sense of proportion in the four agents of production. Land, as one of the agents of production, has a logical value relationship to total property value. Sales of improved properties are analyzed and the values are allocated between land and improvements.
Abstraction: In this method the cost approach is used in the analysis of the improved property sales data. The depreciated replacement cost of the improvements is subtracted from the sale price. The remainder is the indication of land value.
Anticipated Use or Development: Primarily used to value land in transition from agricultural to other uses, this method subtracts total development costs from projected sales prices to derive a value for the land.
Capitalization of Ground Rent: This method uses the income approach to value to establish a current value for land through its future income potential. Agricultural land in Arizona is valued using this method.
Land Residual: Calculates land value by first estimating net income earned by a property and then subtracting income that can be attributed to the improvements, leaving a residual value attributable to the land.