It’s standard procedure for most commercial lenders to request all three approaches to value—sales comparison approach, income approach, and cost approach—be undertaken during an appraisal. Usually, there is a stipulation that an approach may be excluded from the valuation if such an approach is deemed dispensable. This omission can be a point of conflict between lenders and appraisers, as the necessity of one or more approaches is debatable in certain situations. This post attempts to clarify the instances where the cost approach is either relevant or extraneous to a property’s valuation. Being able to prudently determine the importance (or otherwise) of the cost approach to valuation increases efficiency and fosters understanding between lenders and appraisers.
