California Real Estate Practice Exam

Accrued depreciation may be estimated by five general methods. Which of the following are considered indirect methods?

1. Breakdown and engineering methods

2. Capitalized income and market methods

3. Capitalized and engineering methods

4. Market and breakdown methods

The correct answer is: Breakdown and engineering methods

The answer identifies the breakdown and engineering methods as indirect methods of estimating accrued depreciation. This is correct because both methods involve analysis that does not rely directly on observable market data or financial returns from the property itself. In real estate appraisal, the breakdown method typically requires a detailed analysis of a property’s components and can involve examining their individual depreciation. The engineering method, alternatively, utilizes technical assessments of the property's condition and the necessary costs to bring it back to its original state or to current standards. In contrast, the capitalized income and market methods are considered direct methods because they directly relate to the income generated by the property or the sales data of comparable properties. These approaches rely heavily on current market data and financial performance metrics rather than an internal assessment of components. Therefore, the identification of the correct methods is grounded in the distinction between direct analysis using market comparisons and financial metrics versus more indirect evaluations that focus on individual property parts.