Which appraisal method incorporates depreciation calculations directly?

The Cost Approach is the method that incorporates depreciation calculations directly. This approach evaluates real estate by first estimating the cost to replace or reproduce the property, then subtracting any accrued depreciation to arrive at the current value. This means it directly considers the various types of depreciation—physical deterioration, functional obsolescence, and external obsolescence—that may have impacted the value of the property since it was built or last renovated.

Using the Cost Approach is particularly applicable for properties that are unique or where there are not enough comparable sales to effectively use the Sales Comparison Approach. It is often employed for new construction or specialized properties where replacement costs are easier to estimate.

In contrast, the other methods, while they provide valuable insights into property valuation, do not explicitly account for depreciation in the same direct manner. The Sales Comparison Approach focuses on comparing similar properties to derive value based on market sales, while the Income Approach analyzes the revenue-generating potential of a property, relying more on income projections than on the actual physical deterioration or functional issues of the property itself. The Market Approach, similar to the Sales Comparison, relies on data from the market without incorporating depreciation calculations directly.