Definition
The Breakdown Method in real estate appraisal is a detailed technique used to separate and measure the different components of accrued depreciation. This method involves categorizing depreciation into three primary types:
- Physical Depreciation: This refers to the loss in property value due to physical wear and tear over time.
- Functional Obsolescence: This occurs when a property becomes outdated or less functional due to changes in technology, design standards, or consumer preferences.
- Economic Obsolescence: This form of depreciation is due to external economic factors that adversely affect property value, such as changes in the neighborhood, market conditions, or government regulations.
Examples
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Residential Property Example: An appraiser uses the Breakdown Method to evaluate a 30-year-old home. They break down the total depreciation into physical depreciation from wear and tear, functional obsolescence from an outdated kitchen, and economic obsolescence due to a new highway built nearby.
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Commercial Property Example: For a 20-year-old office building, an appraiser separately measures the physical degradation of the structure, functional obsolescence due to outdated office layouts, and economic obsolescence caused by a decline in the local business district.
Frequently Asked Questions (FAQs)
What is the primary goal of the Breakdown Method?
The Breakdown Method aims to provide a more accurate estimate of property value by meticulously measuring different types of depreciation.
How does the Breakdown Method differ from the Age-Life Method?
While the Breakdown Method divides depreciation into specific categories, the Age-Life Method approximates total depreciation based on the age and expected life span of the property, offering a less detailed approach.
When is the Breakdown Method most useful?
This method is particularly useful for properties with significant obsolescence issues or when precise valuation is crucial, such as for insurance claims, litigation, or investment decisions.
Is the Breakdown Method more time-consuming than other methods?
Yes, the Breakdown Method requires detailed assessments and is generally more time-consuming due to its comprehensive nature.
Related Terms
- Accrued Depreciation: The total depreciation accumulated over time, due to physical wear and tear, functional obsolescence, and economic obsolescence.
- Reproduction Cost New: The cost to construct an exact replica of the existing property at current prices.
- Cost Approach: A property valuation method that determines value based on the cost to reproduce or replace the property, minus depreciation.
- Age-Life Method: A simplified way to estimate property depreciation by considering the property’s age relative to its useful life.
Online Resources
- Appraisal Institute: Provides guidelines and courses on various appraisal methods.
- The Appraisal Foundation: Offers resources and educational material about standards in real estate appraisal.
- Federal Housing Administration (FHA) - Appraisal Guidance: FHA’s appraiser guidance and resources.
References
- Appraisal Institute. (2020). The Appraisal of Real Estate. 15th Edition.
- The Appraisal Foundation. (2021). Uniform Standards of Professional Appraisal Practice (USPAP).
- Harrison, M & Johnson, C. (2019). Real Estate Appraisal: From Value to Worth.
Suggested Books for Further Studies
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The Appraisal of Real Estate by the Appraisal Institute
- A comprehensive guide on valuation concepts and practices.
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Real Estate Valuation and Strategy: A Guide for Family Offices and Their Advisors by David Hartzell and Andrew E. Baum
- This book provides deep insights into valuation techniques and strategic real estate investing.
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Fundamentals of Real Estate Appraisal by William L. Ventolo Jr. and Martha R. Williams
- An essential resource for understanding various appraisal methodologies.
