Observed Condition involves estimating depreciation based on what?

The correct answer focuses on the breakdown of different components of depreciation when estimating depreciation through the Observed Condition method. This approach examines various factors contributing to a property's value loss over time. These factors typically include physical deterioration (the wear and tear on a property), functional obsolescence (loss of value due to outdated features or layouts), and external obsolescence (reduction in value due to external factors such as economic downturns or neighborhood decline).

By analyzing these components individually, the appraiser can determine a more accurate depiction of the property’s current condition and value. This detailed breakdown allows for a nuanced understanding of the specific areas where depreciation occurs, rather than just relying on a single aspect, like physical deterioration.

In contrast, approaches that focus solely on physical deterioration do not capture the full picture of a property's value decrease. Similarly, using average market depreciation rates or replacement costs for the entire property may overlook the unique aspects of the property’s condition and the specific factors contributing to its depreciation. This comprehensive method ensures that any valuation reflects the true market value in light of all relevant depreciation factors.