What is depreciation in the context of real estate appraisal?

Depreciation in the context of real estate appraisal refers to the reduction in the value of a property over time. This loss of value can occur due to several factors, including physical deterioration, functional obsolescence, and external economic factors. Physical deterioration might entail wear and tear from usage, while functional obsolescence could arise from outdated design or configurations that no longer meet current market preferences. External economic factors include changes in the neighborhood or market conditions that negatively impact property value.

Understanding depreciation is crucial for appraisers because it affects the current market value of a property, which is vital for buyers, sellers, and investors in making informed decisions. By evaluating the reasons behind a property’s depreciation, appraisers can provide a more accurate assessment of its worth, helping all parties involved in the transaction understand the property's market position better.