The main way that determines the market value of real estate, machinery and equipment is the costly approach, which is based on the principle of substitution. According to it, a person pays an unjustified price for an object if it is higher than that which can be paid for a similar one of the same utility and quality.
When real estate is assessed, those approaches are taken into account that allow the most accurate reflection of its value. It is costly that is the main one. It is understood that the value of the object in this case consists of the market price of the site and those expenses that are necessary to recreate, for example, the building in its current form.
The cost approach to real estate valuation is carried out in several stages:
1. The price of the land is determined, which takes into account the most appropriate use of it.
2. The amount that will be spent on the construction of a similar facility is calculated.
3. The amount of profit received by the entrepreneur is determined.
4. Subtracted physical, functional and external wear.
5. A final calculation of the cost of the site and the construction of the building itself is carried out, which should take into account the adjustment for wear.
The cost approach, meanwhile, has disadvantages in use. The main one is that it takes a lot of time to determine the exact value of a building. So, when the restoration of an old building is carried out, it is almost impossible to accurately determine the costs of its reconstruction and the expected wear. As for typical buildings, it is this approach that is most optimal in their assessment, because it is very easy to use. In some situations, it is the only possible option, for example, when assessing buildings for special purposes (schools, train stations, power plants) or insurance cost.
The cost approach is often used when evaluating fixed assets, construction in progress or analyzing the most efficient use of the site.
As for the calculation of the cost of construction, they are carried out using four main methods: index, comparative unit, breakdown into components and quantitative examination.
So, the last survey is to draw up estimates for direct costs that apply to all types of work, materials, means of mechanization, utilities, etc. Investor profit and overhead are also added to these costs . This method is considered the most accurate, but also the most time-consuming to use, because it requires the evaluator knowledge in the field of construction and budgeting.
The cost approach to real estate appraisal also uses a componentization method, which is a bit like a quantitative one, but not so laborious. The fact is that he uses not unitary, but consolidated rates of all structural elements.
As for the comparative unit method , its use is justified for model comparisons. So, in order to evaluate the object, a similar technology and characteristics is chosen. Selection is carried out according to specialized reference books. The method is the simplest and therefore has a very wide application.
The index method consists in the fact that the book value is multiplied by special indices, which are approved by state standards. It is believed that this method has the lowest degree of accuracy.
The cost approach can be used when evaluating any property, but its application is not always justified. The fact is that for objects that will generate income, it is used very rarely, but using it when evaluating built-in rooms is simply incorrect.