What is the first step in the cost approach?

The first step in the cost approach to valuation is to estimate the land value as if vacant. This step is crucial because the cost approach hinges on the concept that the value of a property is equal to the cost of constructing a replica of it, plus the value of the land it occupies. By determining the land value first, an appraiser establishes a baseline against which the costs of construction can be compared.

Estimating land value as if vacant helps isolate the value of the land from any improvements, thereby ensuring that the total property value reflects only the contributions from both the land and any constructed improvements. This foundational step is essential for appraisers to create an accurate and reliable appraisal using the cost approach.

Other steps like estimating construction costs, analyzing comparable sales, and determining annual operating expenses come later in the process. They build upon the established value of the land to ultimately derive the total value of the property. However, without accurately assessing the land value, the entire cost approach could be flawed or miscalibrated.