1. The Student Handbook to T HE A PPRAISAL OF R EAL E STATE 1 Chapter 19 Depreciation Estimates

2. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 2 Depreciation 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 Curable or incurable? Methods of estimating depreciation  Market extraction method  Economic age-life method  Breakdown method

3. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 3 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

4. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 4 Market Extraction Method Procedure 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 3.Subtract the value of the land (V L ) 4.Estimate the reproduction or replacement cost 5.Subtract the calculated value of the building(s) from the adjusted sale price to show the depreciation Applicability and limitations

5. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 5 Depreciation of Newer Improvements Estimated Using Sales Comparison

6. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 6 Depreciation of Older Improvements

7. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 7 Depreciation of an Office Building

8. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 8 Economic Age-Life Method Effective age divided by economic life = percentage depreciation  For example, a 10-year-old roof with a 20-year life is 50% depreciated (10/20). Applicability and limitations Variations of the economic age-life method

9. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 9 Breakdown Method Methods of calculating depreciation in the breakdown method  Estimation of 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  Capitalization of lost income Applicability and limitations

10. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 10 Types of Depreciation Physical deterioration  Curable physical deterioration – deferred maintenance  Incurable physical deterioration – short-lived items  Incurable physical deterioration – long-lived items  Estimating all forms of physical deterioration using the economic age-life procedure Functional obsolescence  Problem-solving for functional obsolescence  Using the functional obsolescence procedure External obsolescence

11. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 11 The Functional Obsolescence Procedure

12. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 12 Curable Functional Obsolescence Caused by a Deficiency Requiring an Addition

13. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 13 Incurable Functional Obsolescence Caused by a Deficiency

14. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 14 Curable Functional Obsolescence Caused by Deficiencies Requiring Substitution or Modernization

15. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 15 Curable Functional Obsolescence Caused by a Superadequacy

16. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 16 Incurable Functional Obsolescence Caused by a Superadequacy

17. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 17 Cost Approach

18. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 18 Residential Cost Approach

19. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 19 Problems Suggested solutions begin on page 428.

20. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 20 Problems 7 and 8

21. Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 19 21 Problems 7 through 10—Suggested Solutions