cost depreciation is not used for location and site adjustments; they are separate components within the real estate appraisal process.
- Location and site adjustments relate to the value of the land itself and are typically estimated using the sales comparison approach, analyzing recent sales of similar vacant land plots in the area.
- Depreciation (specifically, accrued depreciation in the cost approach) refers to the loss in value of the improvements(buildings, etc.) due to any cause, which is categorized into:
- Physical deterioration: Wear and tear over time.
- Functional obsolescence: Deficiencies in a property's design or layout compared to modern standards.
- External obsolescence: A loss in value caused by negative factors outside the property itself, such as a busy road, proximity to a landfill, or general market conditions.
External obsolescence is the only type of "depreciation" that accounts for a property's
location in a general market sense, but it is applied as a deduction from the improvements' cost, not as an adjustment to the land value. The land value is estimated separately and added to the depreciated cost of the improvements to arrive at the total property value.
And there you have it.
Dude. Do you really want to go there?
Let the AI Battle begin lol my AI is better than yours
Yes,
cost-depreciation approaches can absolutely be used to extract both location (site) adjustments and other site-related adjustments in real estate appraisals, and this is a widely accepted and frequently used technique by professional appraisers—especially when the sales comparison approach has limited data or when valuing special-purpose properties.
How it works in practice
1.
The most common application is to
isolate the site value from improved sales using the breakdown from the cost approach:
- Take a comparable improved sale.
- Estimate replacement cost new (RCN) of the improvements using Marshall & Swift, local cost data, etc.
- Estimate all forms of depreciation (physical, functional, external) from the market (often using age-life, market extraction, or observed condition).
- Depreciated improvement value = RCN – Total Depreciation
- Site Value = Sale Price – Depreciated Improvement Value
This extracted site value is then used directly in the subject’s cost approach or as evidence of land value for the sales comparison approach.
This is formally called the
market extraction method (or abstraction method) of land valuation and is one of the three primary techniques recognized by The Appraisal Institute (along with sales comparison and allocation).
2.
Appraisers frequently use the cost/depreciation method to quantify
location or site differences when direct paired-sales data is unavailable:
Example scenario:
- Comp 1: Superior location (downtown commercial), sold for $1,200,000
- Comp 2: Inferior location (secondary street), sold for $900,000
- Buildings are very similar in size, age, condition, and design.
Steps to extract a location adjustment:
- Estimate RCN of improvements on both comps (often nearly identical).
- Estimate total depreciation on both (if age/condition similar, depreciation % will be close).
- Calculate contributory value of improvements for each:
- Comp 1: ~$700,000
- Comp 2: ~$680,000 (minor difference)
- Difference in sale prices: $1,200,000 – $900,000 = $300,000
- Difference attributable to improvements: only ~$20,000
- Therefore, ~$280,000 (or ~30%) of the price difference is attributable to superior location/site.
The appraiser can then apply a
+25% to +35% location adjustment (or a dollar amount) to inferior comparables when adjusting to the subject.
This technique is particularly common for:
- Commercial properties (office, retail, industrial)
- Properties with significant external obsolescence (e.g., bad traffic patterns, declining areas)
- Special-purpose or limited-market properties where pure paired sales are rare
Appraisal Standards Acceptance
- USPAP (Uniform Standards of Professional Appraisal Practice) permits and encourages the use of the cost approach and depreciation analysis to support adjustments when market data is limited.
- The Appraisal of Real Estate (15th Ed.) explicitly discusses using depreciation analysis from the cost approach to support site value extraction and location adjustments (see Chapters 19 & 20).
- Fannie Mae, Freddie Mac, FHA, and most reviewers accept this methodology when properly supported.
Summary
Yes — using cost and depreciation analysis to extract location/site value and to quantify location adjustments is not only allowed, it is a standard, defensible, and often necessary technique in appraisal practice, especially when direct market evidence is thin. It is particularly powerful because it relies on market behavior (the actual sale prices) rather than opinion alone.
