When neither suitable comparable prices nor rental income can be used for a house, the substance value remains: The cost approach values a property based on the cost of rebuilding it today, less depreciation due to age and plus the land value. It is the third of the three valuation methods provided for by law and is used primarily for owner-occupied single-family and two-family houses. We show you when the substance value counts, how the calculation works step by step, and what you as an owner should pay attention to.
What is the cost approach?
The cost approach determines the value of a property from two components: the value of the undeveloped land (land value) and the value of the buildings (building cost value). The basic idea is: What would it cost to build this building anew today – and how much is this substance still worth after many years of use?
The legal basis is the Real Estate Valuation Ordinance (ImmoWertV), which has been in force since January 1, 2022. In § 6, it names three methods by which the market value – equivalent to the market value under § 194 BauGB – can be determined: the comparative value approach, the income approach, and the cost approach. The rules on the cost approach are set out in §§ 35 to 39 ImmoWertV. Under § 35, the cost value consists of the preliminary cost values of the structural improvements and the land value.
While the comparative value approach is based on the actual purchase prices achieved for similar properties and the income approach on the rental income that can be achieved, the cost approach deliberately does without both. It views the property as a physical asset – hence the name.
When is the cost approach used?
The method is always the first choice when neither comparable prices nor return considerations meaningfully reflect the market. Typical cases include:
- Owner-occupied single-family and two-family houses: Here, the focus is not on returns but on living in one’s own property. For this group of buyers, the substance counts.
- Individual or rare properties: In the case of unusual architecture, special features, or a specific location, there are simply no comparable sales.
- Special uses: Also for some commercial or for public buildings without a genuine comparable market, the asset value is the most reliable measure.
The method also plays an important role in tax law. For inheritance and gift tax purposes, the tax office values developed properties for which no comparable or income value can be established using the standardized asset value method pursuant to Sections 189 to 191 of the Valuation Act. Since the Annual Tax Act 2022, these rules have been aligned with the ImmoWertV – including through a regional factor, an age-related value reduction factor and, in some cases, longer useful lives. In many cases, this has resulted in higher tax values since 2023.
The calculation step by step
The path from the substance value to the market-based market value follows a fixed sequence.
Step 1: Determine the land value
The land value is calculated by multiplying the plot area by the standard land value. This is published by the municipal expert committees – usually free of charge via the federal states’ official standard land value portals. The land value is always treated as if the plot were undeveloped.
Step 2: Determine the building asset value based on construction costs
Standard construction costs are used for the building: model-based cost figures per square meter of gross floor area, graduated according to building type and quality standard. These figures are multiplied by the area to obtain the hypothetical new-build costs. The basis is Section 36 ImmoWertV together with the relevant cost tables (NHK 2010).
Step 3: Adjust to the valuation date
The cost figures originate from a base year and must be brought up to date. For this purpose, Section 36 ImmoWertV prescribes the construction price index of the Federal Statistical Office. The extent to which this step matters is shown by the current development: In February 2026, construction prices for residential buildings were 3.3 percent higher than in the previous year (Destatis). In addition, a regional factor derived by the expert committee adjusts the costs to the local construction price level.
Step 4: Deduct age-related value reduction
A 40-year-old building is not worth as much as a new build. An age-related value reduction factor is therefore applied. Pursuant to Section 38 ImmoWertV, this corresponds to Factor as the ratio of the remaining useful life to the total useful life. For single- and two-family houses as well as apartment buildings, Annex 1 of the ImmoWertV assumes a total useful life of 80 years. For a 25-year-old house, 55 years therefore remain – the factor is 55 divided by 80, approximately 0.69.
Step 5: Determine the preliminary real value
The components are now added: the building real value reduced according to age, the value of structural outdoor facilities (such as paths, terraces or garages pursuant to § 37 ImmoWertV), and the land value. The result is the preliminary real value.
Step 6: Market adjustment using the real value factor
The preliminary real value does not yet correspond to the market value. It is therefore multiplied at the end by the property-specific adjusted real value factor (§ 39 ImmoWertV). The valuation committees derive this factor – also called the market adjustment factor – from actual sales and publish it in their real estate market reports. In sought-after locations, it is often above 1.0; in weaker regions, below it.
A simplified calculation example
For illustration, a deliberately rounded example for a single-family house, built in 2001 and valued in 2026:
- Land value: 500 m² plot × 400 euros land reference value = 200,000 euros
- Construction costs: 200 m² floor area × 2,000 euros (already adjusted to the valuation date and region) = 400,000 euros
- Age-related reduction in value: Factor 0.69 → building real value = 276,000 euros
- Outdoor facilities: approximately 10,000 euros
- Preliminary real value: 200,000 + 276,000 + 10,000 = 486,000 euros
- Real value factor 1.2: 486,000 × 1.2 = 583,200 euros preliminary market value
The figures are exemplary and do not replace an appraisal. However, they show how strongly the age-related reduction in value and the real value factor influence the result.
Advantages and disadvantages of the real value method
Like every method, the real value method has strengths and weaknesses. You should be aware of these points:
- Advantage – applicable even without a comparable market: Especially for unique or owner-occupied properties, it provides a comprehensible value where other methods fail.
- Advantage – transparent derivation: Land, substance and age are stated separately. This makes the result easy to verify and suitable for courts and tax offices.
- Advantage – substance-oriented: The value remains closely tied to the actual construction costs – a stable anchor in highly fluctuating markets.
- Disadvantage – detached from the market without a real asset factor: The pure asset value does not reflect supply and demand. Only the real asset factor establishes the link to the market, and it fluctuates considerably by region.
- Disadvantage – many model assumptions: Cost parameters, useful lives and factors are based on model values. Small deviations in the assumptions noticeably change the result.
- Disadvantage – effort involved: The determination is more complex than a quick comparative price search and should be handled by experts.
FAQ on the real asset value method
When is the real asset value method applied?
Whenever neither meaningful comparative prices nor reliable rental income can be identified. This is the classic case for owner-occupied single-family or two-family homes, as well as for individual or rare properties.
What is the difference between the comparative value and income approach?
The comparative value method uses the purchase prices of similar properties, while the income approach uses the achievable rental income. The real asset value method, by contrast, looks at the costs of a new build less age-related depreciation, supplemented by the land value. All three are governed by Section 6 ImmoWertV.
What are standard production costs?
These are standardized cost parameters per square meter, which can be used to estimate the hypothetical new-build costs of a building. They are differentiated by building type and level of fittings and are adjusted to the valuation date using the construction price index.
What is the real asset factor?
The real asset factor – also known as the market adjustment factor – converts the calculated asset value into a market-based value. The expert committees derive it from actual sales and publish it in the property market reports. It is the decisive lever for establishing the link to the market.
How does the age of the building affect the value?
Through the age-related depreciation factor: remaining useful life divided by total useful life. The older the building, the lower the factor and therefore the building’s real asset value. Modernizations can extend the remaining useful life and increase the value again.
Does the real asset value method play a role in inheritance tax?
Yes. If no comparative or income values are available, the tax office values developed land using the standardized real asset value method pursuant to Sections 189 to 191 of the Valuation Act. Since the Annual Tax Act 2022, these values have often been higher than before.
Conclusion: The "Asset value as the third pillar of valuation
The cost approach completes the trilogy of valuation methods: Where comparable prices are lacking and no rental yield applies, looking at the land and building substance provides a reliable value. The correct age-related depreciation and a suitable cost factor from the local property market report are crucial for a result close to market value. The method is well suited for an initial assessment – for legally binding purposes such as inheritance, divorce or sale, you should leave it to an appraiser or expert committee. And if you would like to sell afterward, you will find the right reach for your property on TraumImmo.