What must be considered when appraising a property under the cost approach?

When appraising a property under the cost approach, the focus is on determining the current cost to replace or reproduce the improvements on the property and then adjusting for any depreciation. This method involves estimating the cost that would be incurred to build a similar property today with the same utility, taking into account two main components: the cost of construction and the depreciation of the existing improvements.

To begin, the appraiser calculates the total cost to construct a brand-new version of the property, ensuring that they reference current market conditions, material costs, and labor costs. Subsequently, they would assess the depreciation factor which can arise from various sources, such as physical wear and tear, functional obsolescence, or economic obsolescence. The resulting figure gives a comprehensive view of the value of the property based on the cost required to reproduce those improvements, specifically addressing both the current value without depreciation and the reduction in value due to factors affecting the property.

This approach is particularly useful for properties that are not frequently bought or sold in the marketplace, such as special-use properties or new constructions, where comparable sales may not be readily available. Thus, option B accurately captures the essential methodology of the cost approach, making it the correct answer.