Certified Residential Appraiser Practice Exam

Which of the following methods is used to determine depreciation?

1. Cost Approach

2. Sales Comparison Method

3. Market Extraction

4. Income Approach

The correct answer is: Market Extraction

The correct method for determining depreciation is the market extraction method. This technique specifically focuses on estimating depreciation by analyzing the difference between the sale prices of comparable properties that exhibit various levels of depreciation and the cost to reproduce those properties new. By extracting information from sales data, the appraiser can derive a depreciation rate that reflects the market's view of property value decline over time. In practice, the market extraction method allows appraisers to assess how much value has been lost due to factors such as physical wear and tear, functional obsolescence, or economic factors affecting the property. It provides a market-based approach to determining depreciation rather than relying solely on theoretical models or cost estimations. Other methods presented, while useful for valuation purposes, do not directly determine depreciation. The cost approach involves estimating the cost to replace or reproduce an asset and then adjusting for depreciation. The sales comparison method looks at recent sales of similar properties but does not isolate depreciation specifically. The income approach focuses on potential income generation from the property, which may consider depreciation in terms of capitalization but is not a direct method for determining depreciation alone.