Depreciation
National Real Estate Exam glossary · Valuation
Definition
In appraisal, the loss in value of improvements from any cause, grouped into three classes: physical deterioration (wear and tear), functional obsolescence (outdated design or features), and external (economic) obsolescence (negative influences outside the property line). External obsolescence is always incurable because its cause lies beyond the owner's control.
Depreciation in plain English
Depreciation, in the world of appraising property, just means the building has lost value for some reason (note: it's about the building and other improvements, not the land itself). Appraisers sort the causes into three buckets: physical deterioration (it's worn out — a leaky roof, cracked walls), functional obsolescence (it's outdated or badly designed — like a house with one bathroom for five bedrooms), and external obsolescence (something bad outside the property is dragging the value down — a new noisy highway or a factory next door). That last kind is considered impossible to fix, because the owner can't do anything about problems beyond their own property line. It's like a phone losing value: sometimes it's a cracked screen, sometimes it's just an old model, and sometimes the whole neighborhood's cell signal went bad — and you can't personally fix the signal.
Learn these first
Related National Real Estate Exam terms
National Real Estate Exam practice questions · National Real Estate Exam flashcards · National Real Estate Exam study guide