The Student Handbook to T HE A PPRAISAL OF R EAL E STATE 1 Chapter 16 Depreciation Estimates

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 2 Depreciation is the difference between the cost of construction of the improvements on the date of appraisal and the value of the improvements as of that date. Depreciation in appraising and accounting

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 3 Table 16.1 Book Depreciation vs. Market Value

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 4 Age and Life Relationships Actual Age and Effective Age Actual age is a fact. Effective age is a numerical estimate. Economic Life and Useful Life Economic life is the period of time over which improvements contribute to property value. Useful life is the period of time over which a structure may reasonably be expected to perform the function for which it was designed. Remaining Economic Life and Remaining Useful Life

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 5 Methods of Estimating Depreciation Market Extraction Method Age-Life Method Breakdown Method

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 6 Market Extraction Method 1. Find comparables with the same losses as the subject. 2. Make adjustments to the sale prices for Property rights included Seller financing concessions Conditions of sale Subtract the value of the land (V L ). Estimate the reproduction or replacement cost. Subtract the calculated value of the building(s) from the adjusted sale price to show the depreciation.

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 7 Table 16.2 Depreciation of Newer Improvements Estimated Using Sales Comparison

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 8 Table 16.3 Depreciation of Older Improvements

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 9 Table 16.4 Depreciation of an Office Building

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Age-Life Method The effective age divided by the economic life = depreciation. A 10-year-old roof with a 20-year life is 50% depreciated. Applicability and limitations

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Breakdown Method Calculating Depreciation in the Breakdown Method Estimate the cost to cure the problem. Application of the age-life ratio Application of functional obsolescence procedure Analysis of market data to obtain physical, functional, or external losses Capitalize income lost Applicability and limitations

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Types of Depreciation Curable physical deterioration – deferred maintenance Incurable physical deterioration – short-lived items Incurable physical deterioration – long-lived items

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Estimating all forms of physical deterioration using age- life procedure Calculating functional obsolescence Problem-solving for functional obsolescence Using functional obsolescence procedure

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table 16.5 The Functional Obsolescence Procedure

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table 16.6 Curable Functional Obsolescence Caused by a Deficiency Requiring an Addition

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table 16.7 Incurable Functional Obsolescence Caused by a Deficiency

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table 16.8 Curable Functional Obsolescence Caused by Deficiencies Requiring Substitution or Modernization

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table 16.9 Curable Functional Obsolescence Caused by a Superadequacy

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table Incurable Functional Obsolescence Caused by a Superadequacy

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table Cost Approach

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Table Residential Cost Approach

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Problems Suggested solutions begin on page 365.

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Problems 7–8

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Suggested Solution for Problems 7–10