What does "depreciation" signify in real estate appraisal?

Depreciation in real estate appraisal refers to the loss of property value due to a variety of factors, such as physical wear and tear, functional obsolescence, or economic decline. This concept is crucial in the appraisal process, as it helps determine the current value of a property by accounting for its diminishing worth over time.

Real estate appraisers employ depreciation as a method to adjust the value of properties, especially when they evaluate investment properties, residential homes, or commercial real estate for their current market value. Different types of depreciation—physical, functional, and external—impact a property in distinct ways, allowing appraisers to make informed decisions based on comprehensive analysis.

Understanding depreciation is essential for appraisers to provide accurate assessments of a property's value to buyers, sellers, and investors. By recognizing the causes of value loss, appraisers can better reflect the true market conditions, ensuring that their appraisals align with the realities of property ownership and investment. Other options do not accurately represent the concept of depreciation in this context, as they pertain to value appreciation, current market value at sale, or improvement expenses.