Replacement Cost
The estimated cost to construct a building with equivalent utility to the subject improvements, using current materials, standards, and design, but not necessarily an exact replica.
Replacement cost is the more commonly used cost estimate in the cost approach because it reflects what a rational buyer would actually spend — modern construction methods and materials rather than exact historical reproduction. For example, a 1920s home with plaster walls and knob-and-tube wiring would be replaced with drywall and modern electrical. Replacement cost is typically lower than reproduction cost and avoids the need to estimate curable functional obsolescence related to outdated building methods.
Related Terms
Reproduction Cost
The estimated cost to construct an exact replica of the subject improvements using the same materials, construction methods, workmanship, and design as of the effective date of the appraisal..
Cost Approach
A valuation method that estimates value by calculating the cost to reproduce or replace the improvements, subtracting accrued depreciation, and adding the land value.
Depreciation
A loss in value from any cause.
Functional Obsolescence
A loss in property value caused by deficiencies or superadequacies within the property itself, such as an outdated floor plan, insufficient electrical capacity, or an over-improvement relative to the neighborhood..
More in Valuation Approaches
View allSales Comparison Approach
A valuation method that estimates a property's value by comparing it to similar properties that have recently sold in the same market area.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Market Value
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus..
Reconciliation
The process by which an appraiser evaluates and weighs the results from the different valuation approaches (sales comparison, cost, and income) to arrive at a final opinion of value..