How is 'depreciation' defined in real estate appraisals?

In real estate appraisals, depreciation is defined as a reduction in a property's value due to various factors. This can occur for multiple reasons, such as physical wear and tear, functional obsolescence, or economic obsolescence. Physical wear and tear refers to the deterioration that occurs as a property ages, while functional obsolescence may arise from changes in market preferences that make certain features of the property less desirable. Economic obsolescence, on the other hand, can occur due to external factors in the economic environment that negatively affect property values, such as changes in the neighborhood or local economy.

The correct understanding of depreciation is crucial for appraisers as it directly impacts the valuation of the property. By assessing the specific factors contributing to depreciation, an appraiser can adjust the property's value to reflect its current market position accurately. Recognizing the reasons and types of depreciation encapsulates the concept adequately for effective appraisal practices.