Texas Real Estate Appraisal Practice Exam

Depreciation refers to the reduction in value of an asset over time due to factors such as wear and tear, obsolescence, or adverse market conditions. In the context of real estate appraisal, depreciation is a crucial consideration when determining the value of improvements.

When improvements, such as buildings or renovations, experience depreciation, their market value decreases as a reflection of their current state and overall economic conditions. This reduction is an essential consideration for appraisers as it affects how potential buyers perceive the worth of the property. Depreciation can be categorized into three main types: physical depreciation (due to physical wear and aging), functional obsolescence (which occurs when a property no longer meets the needs or desires of the market), and external obsolescence (which results from external factors negatively impacting the property's value).

Understanding this aspect of valuation helps appraisers provide accurate assessments of a property's worth, ensuring clients make informed decisions. Thus, depreciation inherently decreases the value of improvements, leading to the conclusion that it has a direct negative impact on the overall valuation of property enhancements.