Depreciation
A loss in value from any cause. In appraisal, depreciation is the difference between the cost new of the improvements and their current market value. It includes physical deterioration, functional obsolescence, and external obsolescence.
Depreciation in the appraisal context differs from accounting depreciation. It reflects real loss in market value, not a tax schedule. Physical deterioration results from wear and tear, deferred maintenance, or age. Functional obsolescence arises from outdated design, layout, or systems within the property. External (economic) obsolescence is caused by factors outside the property — such as a busy highway, declining neighborhood, or zoning changes. Depreciation can be curable (economically feasible to fix) or incurable (cost to cure exceeds the value added). The effective age of a property often differs from its actual age depending on maintenance and updates.
Related Terms
Cost Approach
A valuation method that estimates value by calculating the cost to reproduce or replace the improvements, subtracting accrued depreciation, and adding the land value.
Functional Obsolescence
A loss in property value caused by deficiencies or superadequacies within the property itself, such as an outdated floor plan, insufficient electrical capacity, or an over-improvement relative to the neighborhood..
External Obsolescence
A loss in property value caused by factors external to the property, such as a busy highway, industrial proximity, declining neighborhood, or unfavorable zoning changes.
Effective Age
The age of a property as indicated by its condition, maintenance, and updates, which may differ from its actual (chronological) age.
Physical Deterioration
A loss in property value resulting from wear and tear, damage, structural failure, or neglect of the physical improvements.
More in Valuation Approaches
View allSales Comparison Approach
A valuation method that estimates a property's value by comparing it to similar properties that have recently sold in the same market area.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Market Value
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus..
Reconciliation
The process by which an appraiser evaluates and weighs the results from the different valuation approaches (sales comparison, cost, and income) to arrive at a final opinion of value..