A 12-unit apartment building has a single, centrally located laundry room serving all units — a design common in 1960s construction. Current market norms require in-unit washer/dryer hookups or at minimum, one laundry room per 6 units. Adding five additional laundry rooms (one per two floors) would cost $185,000 and is physically feasible. However, local rent surveys show no premium for buildings with more laundry access, and tenants consistently accept the existing arrangement. What is the appropriate treatment of this feature under the cost approach?
Correct Answer
C) No functional obsolescence — the feature meets minimum market expectations.
Functional obsolescence exists only when a deficiency or superadequacy results in a demonstrable loss of value relative to market expectations. USPAP Standards Rule 1-4 and the AQB Content Outline require that functional obsolescence be supported by market evidence — e.g., rent loss, sales price discount, or higher vacancy. Here, rent surveys show no premium for improved laundry access, and tenants accept the arrangement, indicating the current configuration satisfies market-minimum functional utility. Therefore, no functional obsolescence is present. Option C is correct. Option A incorrectly assumes curability without economic justification; Option B misapplies incurable treatment without evidence of value loss; Option D confuses functional design with physical condition.
Why This Is the Correct Answer
The rent surveys are the controlling evidence. If buildings with more laundry access command no rent premium, then the central laundry room causes no measurable rent loss, no elevated vacancy and no price discount, so the property suffers no loss in value from the feature. A cost approach deduction with no corresponding market loss would understate value and could not be supported. The correct treatment is therefore no functional obsolescence for this item.
Why the Other Options Are Wrong
Option A: Curable functional obsolescence: $185,000.
Calling it curable at $185,000 makes the cost to cure the measure of the problem, which inverts the test. An item is curable functional obsolescence only when the value added by curing equals or exceeds the cost to cure; here the added value is zero by the rent survey, so spending $185,000 would be a pure loss to the owner. A prudent buyer would not pay for the cure and would not discount the price by its cost either.
Option B: Incurable functional obsolescence: $185,000.
Labeling it incurable at $185,000 mixes two incompatible ideas. Incurable functional obsolescence is measured by capitalizing the rent loss or by the value penalty the market imposes, never by the cost of a cure the market would not pay for. Beyond the wrong measurement method, the stem provides no evidence of any value penalty at all.
Option D: Physical deterioration — because the existing equipment is outdated.
Physical deterioration is the wear, tear and aging of physical components: worn machines, corroded plumbing, a failing floor. Nothing in the stem says the laundry equipment is worn out; the issue raised is the number and location of laundry rooms, which is a design and utility question. Age of the design is not the same thing as deterioration of the material.
No Loss, No Obsolescence
Before you deduct anything for functional problems, ask for the receipt: what rent, what vacancy, what price discount proves the market cares? If the stem cannot produce a number showing the market punishes the feature, the deduction is zero no matter how outdated the design sounds.
How to use: When a question describes an old-fashioned feature and then quietly adds that rents, tenants or buyers are unaffected, that clause is the answer. Treat any dollar cost to cure in the stem as a distractor until value loss is established.
Exam Tip
Read the last sentence of the fact pattern first on obsolescence questions; the phrase about market reaction usually decides between a deduction and zero.
Common Mistakes to Avoid
- -Treating cost to cure as the measure of obsolescence without proving value loss
- -Assuming any feature that is out of step with current construction is obsolete
- -Classifying a dated design as physical deterioration rather than a functional issue
Concept Deep Dive
Analysis
Functional obsolescence is a loss in value caused by a deficiency or superadequacy in the improvements themselves, but the operative words are loss in value. A design that differs from current construction practice is not automatically obsolete; the market must actually penalize it through lower rent, longer marketing time, higher vacancy or a discounted sale price. This stem deliberately supplies the cost to cure and confirms the cure is physically feasible, because candidates reflexively treat a known cost to cure as the measure of obsolescence. The missing ingredient is the value evidence: rent surveys show no premium and tenants accept the arrangement. Without measurable market resistance there is nothing to deduct in the cost approach.
Background Knowledge
You need to know the three components of accrued depreciation and that functional obsolescence must be supported by market evidence of value loss, not merely by a departure from current design norms. You also need the curable versus incurable test, which compares value added by the cure against the cost of the cure.
Real-World Application
An appraiser inspecting a 1960s walk-up notes the single shared laundry, then pulls rent comparables from newer buildings with in-unit hookups and finds the spread is explained by unit size and finish, not laundry, so the report documents the feature and takes no functional deduction.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Previous Question
A component with a 20-year life is 5 years old and costs $12,000 new. Its accrued depreciation is:
Next Question
An appraiser estimates a commercial office building's total economic life as 60 years and determines its effective age to be 24 years based on physical condition, functional utility, and external influences. What is the building's remaining economic life?