The observed condition method requires the appraiser to view each item being computed individually. It is an appraisal method used to compute depreciation by using the physical deterioration, along with its functional and external obsolescence, in deciding the value of a property. Each individual aspect of the property will be used to estimate the loss in value.
With many categories and varying prices, this method creates a sizeable margin of error. As a result, many appraisers rarely use this method and rely heavily on other methods, particularly the cost per square foot method.
Example
The reproduction of a building costs $920,000. The following would be used to calculate its depreciation over this period.
Physical Deterioration
Curable: $92,000
Incurable $53,000
Functional Obsolescence
Curable $39,000
Incurable $2,000
External Obsolescence
Curable $0
Incurable $0
Total $138,300
Understanding Depreciation
Calculating the depreciation of a property is used to estimate the value of a property. The observed condition method is one of the ways in which they depreciate property.
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