What principle is the foundation of the cost approach to value?

The foundation of the cost approach to value is the principle of substitution. This principle asserts that a buyer will not pay more for a property than the cost to acquire a similar property with equivalent utility. In practical terms, when using the cost approach, an appraiser estimates the cost to replace or reproduce an asset, adjusting for depreciation, and then derives the value based on this cost.

This principle is pivotal because it provides a systematic method for valuing properties that may not have robust market comparables or for which recent sales data might not adequately reflect current conditions. By evaluating what it would cost to replace a property, assessors ensure that the value assigned aligns with what a typical buyer would reasonably be willing to pay in the current market.

The other principles mentioned—supply and demand, cost-benefit, and market analysis—are important in real estate valuation but do not directly underpin the mechanics of the cost approach. They relate more broadly to market conditions and economic factors influencing property value rather than providing the foundational logic that specifically drives the cost approach.