Asset-based valuation method

Cost Approach - The cost approach is a standardized valuation method under the Real Estate Valuation Ordinance (ImmoWertV) that determines the market value of a property based on the construction costs of the building and the land value.

What exactly does the cost approach mean?

Along with the sales comparison approach and the income approach, the cost approach is one of the three standard real estate valuation methods regulated by the ImmoWertV. It is primarily used when a property is predominantly owner-occupied and neither sufficient comparable prices are available nor can rental income serve as a basis for valuation. Typical applications include single-family homes, two-family homes, and special properties such as commercial buildings with specific uses.

The basic principle of the cost approach is: What would it cost to rebuild the building in its current condition, and how much value has it lost due to age and wear and tear? This asset-oriented approach differs fundamentally from the income approach, which focuses on future income, and from the sales comparison approach, which is based on realized market prices.

The calculation is performed in several steps. First, the land value is determined, typically based on the standard land values established by the relevant appraisal committee. Next, the construction costs of the building are calculated. This involves using standard construction costs (NHK)-tabular guidelines that specify construction costs per square meter of gross floor area based on building type, finish standards, and year of construction. The age-related depreciation is deducted from these construction costs; this reflects the value-reducing wear and tear over the building’s useful life to date. The sum of the land value and the building’s real value yields the preliminary real value.

Since the purely calculated real value often deviates from actual market conditions, a market adjustment factor (also called the real value factor) is finally applied. The appraisal committee derives this factor from the ratio of actual purchase prices paid to the respective real value. This adjusts the calculated result to the real market situation.

Calculation in Detail

The formula for the asset value method can be simplified as follows:

Asset value = (construction costs - depreciation due to age + land value) × market adjustment factor

The standard construction costs are based on the ImmoWertV and take into account building type, amenities (basic, medium, high-end), and the construction price index. For an average single-family home, they currently range from approximately 800 to 1,200 euros per square meter of gross floor area.

Depreciation due to age is calculated on a straight-line basis: the property’s current useful life divided by its total useful life, multiplied by the construction costs. Renovations can extend the remaining useful life and thus reduce depreciation. Depending on the construction method, the total useful life for residential buildings is typically 60 to 80 years.

The market adjustment factor varies considerably by region. In sought-after locations, it is above 1.0 (the market pays more than the pure physical value), and in less sought-after areas, it is below 1.0. In structurally weak rural regions of Franconia, the factor can also be significantly below 1.0-a single-family home there is worth less than its structural value would suggest.

Significance of the Remaining Useful Life in the Asset Value Method

A central element of the asset value method is the remaining useful life (RUL). It determines the extent of the age-related depreciation: the shorter the RND, the higher the discount from the construction cost. The RND can be extended through documented modernization measures-this is the so-called modified remaining useful life, which is determined based on the point grid method of the Real Property Valuation Guidelines.

For owners, this means: Every documented modernization (new heating system, new windows, new roof covering) extends the modified RND and thus increases the calculated real value. We therefore recommend that owners carefully retain proof of modernization (invoices, photos) in order to be able to demonstrate the highest possible RND at the time of sale.

Real Value Method and Property Tax

With the 2022 property tax reform (Property Tax Act), the real value also plays a role in calculating property tax for non-residential properties. The federal legislature’s real value model for non-residential real estate resembles the ImmoWertV real value method: It calculates the building’s real value based on construction costs and depreciation due to age, then adds the land value. The resulting property tax assessment figures directly affect the annual property tax burden.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, the cost approach is particularly relevant, as the housing stock is heavily dominated by single-family and two-family homes. For these property types, there are often insufficient comparable sales prices available, meaning the sales comparison approach reaches its limits.

The City of Nuremberg’s Appraisal Committee regularly publishes current asset value factors, differentiated by location and building type. In sought-after Nuremberg neighborhoods such as Erlenstegen or Schmausenbuck, the market adjustment factors are in some cases well above 1.0, indicating that the market here commands prices above the pure asset value. In the surrounding Franconian countryside, however-such as in more rural parts of the Nuremberg region or the Hersbrucker Alb-the factors can be below 1.0. Our network always takes current regional market data into account during the valuation and can provide owners with a realistic assessment of the relationship between the property’s intrinsic value and the price that can actually be achieved in their specific location.

Frequently Asked Questions

When is the cost approach used?

The cost approach is primarily used for owner-occupied residential properties, particularly single-family and two-family homes. It is always used when there are neither sufficient comparable prices for the sales comparison approach nor sustainable rental income for the income approach. The cost approach is also frequently the method of choice for special-purpose properties such as industrial buildings or public buildings.

What is the market adjustment factor, and why is it so important?

The market adjustment factor adjusts the calculated cost value to reflect the actual market situation. Without this factor, the cost approach would merely assess the physical structure of the building, but not its location, demand, or market dynamics. In sought-after locations within the Nuremberg metropolitan region, the factor often ranges from 1.1 to 1.4, meaning that the market-adjusted value is significantly higher than the pure cost value.

How does the cost approach differ from the income approach?

The two methods follow fundamentally different approaches. The cost approach evaluates the physical structure: What does it cost to construct the building, adjusted for depreciation? The income approach evaluates the return: What is the present value of future rental income? For owner-occupied properties without rental income, the cost approach is the appropriate method; for rented properties, the income approach is used.

Can I calculate the cost approach value myself?

A rough estimate is possible using publicly available data: standard land value from the BORIS portal (Bavarian Standard Land Value Information System), standard construction costs from the ImmoWertV, year of construction, and living area of the building. However, a reliable valuation that also incorporates the correct market adjustment factor and stands up to scrutiny by authorities or in financing negotiations requires a qualified appraiser. We would be happy to advise you on the valuation of your property.

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