Real Estate Appraisal Practice Exam

Stacy is using a capitalization rate to determine the impact on a property's value. What method is she employing to measure depreciation?

1. Effective age method

2. Capitalized value

3. Sales comparison approach

4. Physical deterioration

The correct answer is: Capitalized value

Stacy is employing the capitalized value method to measure depreciation because this approach involves converting the income generated by a property into present value using a capitalization rate. This method assumes that the property generates a consistent income stream and estimates its value based on future income potential. By applying a capitalization rate to annual income, she effectively reflects any depreciation in value due to factors such as age, wear and tear, or decreases in income potential over time. The other methods mentioned, such as physical deterioration, focuses specifically on the observable deterioration of the property itself rather than on income or overall value. The effective age method assesses how old a property appears compared to its actual age, while the sales comparison approach relies on market data from comparable properties to determine value. Each of these methods has its unique focus, but it is the capitalized value approach that directly correlates to income and valuation in relation to depreciation.