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I am in the process of buying a home. The lowest cost to rebuild quote I've been able to get is $309,000. I just got my appraisal back today. And it has something call "Cost Approach (If Developed)". This value is $138,736. My question is: are they related? And if so, what can be the cause of such a large difference?

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up vote 2 down vote accepted

There are three main ways of appraising a property.:

  1. Comparable sales. - Great for non-investment homes. Not so good for properties that don't sell very often - like church buildings.

  2. Income value - how much rental income can be generated by the property, and what is that stream of money worth.

  3. Cost to rebuild - There are two key parts to the cost to rebuild. What would it take rebuild a similar structure, and how should depreciation be handled. The 300K figure is the cost to rebuild if the house is destroyed. It doesn't consider the cost of the land, because that is rarely destroyed. But the Cost Approach (If Developed) deducts from the rebuild cost the depreciation. If the house is not new that can be significant. This is not the same as the depreciation calculation used by the IRS, it says that as the house gets older it is not worth as much.

    This figure cannot be used by the fire insurance company. It also doesn't take into account the historic nature. By the depreciation calculation Mount Vernon would be worthless.

    More details can be found here

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