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

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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

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

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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

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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

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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.

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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

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

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

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 10 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

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 11 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

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 12 Types of Depreciation Curable physical deterioration – deferred maintenance Incurable physical deterioration – short-lived items Incurable physical deterioration – long-lived items

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 13 Estimating all forms of physical deterioration using age- life procedure Calculating functional obsolescence Problem-solving for functional obsolescence Using functional obsolescence procedure

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 14 Table 16.5 The Functional Obsolescence Procedure

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 15 Table 16.6 Curable Functional Obsolescence Caused by a Deficiency Requiring an Addition

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 16 Table 16.7 Incurable Functional Obsolescence Caused by a Deficiency

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 17 Table 16.8 Curable Functional Obsolescence Caused by Deficiencies Requiring Substitution or Modernization

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 18 Table 16.9 Curable Functional Obsolescence Caused by a Superadequacy

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 19 Table 16.10 Incurable Functional Obsolescence Caused by a Superadequacy

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 20 Table 16.11 Cost Approach

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 21 Table 16.12 Residential Cost Approach

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 22 Problems Suggested solutions begin on page 365.

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 23 Problems 7–8

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Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 24 Suggested Solution for Problems 7–10

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