This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
The fourth element to be considered is the depreciation of buildings. Mortgage loans are usually made for a long enough term to have the improvements lose appreciably in value from age and the wear and tear of usage during the life of the loan, except in cases of the most expensive construction. The loss through depreciation where a building is kept in good repair is estimated at 1/2 % a year for the highest type of fireproof construction, and increases for different classes of buildings to a maximum of 5% a year, or even more, for cheaply constructed workmen's cottages. If improvements are not kept in good repair - and it is practically impossible for a mortgagee to compel repairs to be made - the further depreciation from this cause must be added. In addition to the depreciation of buildings through age, there frequently occurs a further and more serious depreciation, due to changes in style or new methods of construction, or to a change of utility in the location. An example of such a change of style in detached residences has been the abandonment of the mansard roof, once popular throughout the United States, with the result that residences built in this style of architecture depreciated heavily in value, regardless of the soundness of their structural condition. Other changes in fashion affecting residences are the abandonment of narrow hallways and of stained glass and other exterior ornamentation, together with newer and better methods of heating and lighting houses.
As regards business property, the erection of modern fireproof buildings frequently takes away a large part of the value of the older buildings with which they compete; and the failure of architects formerly to plan their store buildings with the ground-floor frontage all open for the display of goods has greatly depreciated the value of older buildings, or has led to their reconstruction along modern lines at large expense..
There is still a further element of depreciation which comes where there is a change of utility in the location. If a residence property has become suitable only for business, the value of the improvements disappears entirely; and the same is true of any such change of utility, subject, of course, to the possibility of saving a portion of the value of existing improvements through their reconstruction for a new purpose.