What is typically included in the cost approach to valuation?

The cost approach to valuation focuses primarily on estimating the cost to replace or reproduce a property. This method involves calculating the current costs associated with constructing a similar property using modern materials and techniques, or determining the cost to recreate the property exactly as it is. Once the replacement or reproduction cost is established, appraisers typically subtract any depreciation that may have occurred over time to arrive at an overall value for the property.

This approach is particularly useful for valuing new constructions or specialized properties where market data may not be readily available. It emphasizes tangible construction costs rather than market perceptions or income potential, which are more relevant in other approaches like the income approach and sales comparison approach. Consequently, calculating replacement or reproduction costs is central to this method, making it the correct choice in this context.