The cost approach is done to see what the home would cost to construct or reconstruct. This approach looks at the physical attributes of the home. These attributes not only include size, but also the quality materials used in the home. In the event that the appraisal is for an existing home, the appraiser would also consider depreciations of the structure. This would include physical, functional and external issues. The cost approach looks at the property and isolates the values into land and improvements.
It is often reminded to the customers of appraisals that cost does not equal value. This simply means that though it may have cost a large amount of money to install a deck or patio, the market value of this improvement may be more or less than actual costs. Though possible, rarely does cost equal market value. In most cases, it is no uncommon to see that market value is less than cost. There are also times in which costs could be less than market value.