When determining depreciation, which approach provides a method that accounts for market conditions and trends?

The sales comparison approach is ideal for determining depreciation as it directly incorporates current market conditions and trends by analyzing recent sales of comparable properties. This method relies on the principle of substitution, which suggests that a property’s value is influenced by the price that similar properties (comparables) command in the market.

When using the sales comparison approach, an appraiser evaluates factors such as location, amenities, and overall condition of the properties that have recently sold, allowing for a more nuanced understanding of how the market is valuing similar kinds of properties at that moment. Therefore, any depreciation calculated through this approach reflects not only the inherent qualities of the subject property but also prevailing market dynamics, which can significantly impact property values.

In contrast, the cost approach focuses primarily on the cost to replace or reproduce the property, which might not accurately reflect current market perceptions. The income approach emphasizes the revenue-generating potential of a property, often used for investment properties, and does not directly account for prevailing market trends and conditions in the same way as the sales comparison approach. The reconciliation approach is a method of concluding value after considering multiple appraisal methods, rather than directly calculating or accounting for market conditions and trends.