Cost approach: the essence and main features

main method of determining the market value of real estate, machinery and equipment is the cost approach, which is based on the principle of substitution.According to him, a person pays an unjustified price for the object, if it is higher than what you can pay for the same the same utility and quality.

When is the assessment of the property are accounted for those approaches that allow more accurately reflect its value.It is expensive is the main one.It is understood that the value of the object in this case consists of a portion of the market price and the costs that are needed to recreate, for example, a structure in the present form.

cost approach to the assessment of real estate is carried out in several stages:

1. Determine the price of land, which accounts for most of its proper use.

2. Calculate the amount to be spent on the construction of a similar facility.

3. Determine the amount of income received by an entrepreneur.

4. deduct physical, functional and external depreciation.

5. Held the final calculation of cost of land and construction of the building, which should take into account the adjustment for wear.

cost approach, meanwhile, has disadvantages in use.The main one is that to determine the exact value of the building needs to spend a lot of time.So, when performed the restoration of an old building, accurately determine the cost of its re-establishment and the alleged deterioration is almost impossible.With regard to standard buildings, then this approach is the best in their estimation, because it is very easy to use.In some situations, it is the only option, for example, in assessing the special purpose buildings (schools, train stations, power plants) or the insurance value.

cost approach is often used when an assessment of fixed assets, construction in progress and analysis of the most effective use of the site.

Regarding the settlement cost of construction, they are carried out using four basic methods: the index, the comparative unit, breaking down into components and quantitative survey.

So, the last survey is the cost estimate direct costs, which apply to all types of work, materials, mechanization, utilities and so on.These costs add another investor's profit and overhead.This method is considered the most accurate but also the most time-consuming to use, because it requires from the appraiser's knowledge in the field of construction and budgeting.

cost approach in the evaluation of real estate and uses the breakdown into components, which is a bit similar to the quantitative, but is not as time-consuming.The fact that it uses not isolated and aggregated rates of all construction elements.

With regard to the method of comparative unit, its use is justified for type comparisons.Thus, in order to evaluate the object selected by him with similar technologies and specifications.Selection is carried out by a specialized directories.The method is the simplest and therefore has a very broad application.

index method is that the book value is multiplied by special codes which have been approved by state standards.It is believed that this method has the lowest degree of accuracy.

cost approach can be used in the evaluation of any real estate, but not always its use is justified.The fact that the objects to be repaid, it is used very rarely, but its use in the evaluation of embedded spaces simply incorrect.