Property Valuation
An appraiser who uses the cost approach for a 50-year-old building must account for which three types of depreciation?
APhysical, legal, and fiscal depreciation
BPhysical deterioration, functional obsolescence, and external (economic) obsolescence✓ Correct
CMarket depreciation, tax depreciation, and accounting depreciation
DCurable, incurable, and total depreciation
Explanation
Accrued depreciation in the cost approach consists of three types: (1) Physical deterioration — wear, tear, and decay; (2) Functional obsolescence — loss in utility due to outdated design or features; and (3) External (economic) obsolescence — loss in value from external factors. The appraiser subtracts total accrued depreciation from reproduction/replacement cost to estimate value.
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Key Terms to Know
Depreciation
A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
Math Concepts
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