Market evidence isolates a value loss from a home’s inadequate bathroom/layout utility relative to competing homes, rather than physical wear or outside influences. Which cause is identified?
Correct Answer
A) Functional obsolescence
A supported value loss caused by inadequate design or layout relative to the competitive market is functional obsolescence. It is a design deficiency, not deferred maintenance, which is postponed repair of physical wear. Age or dated finishes alone do not quantify it. Physical wear and external market forces are separate causes and may also be present.
Why This Is the Correct Answer
Option A is correct because functional obsolescence is a loss in value caused by the design of the property itself. An inadequate bathroom count or layout relative to competing homes is a design deficiency. The market evidence isolates this cause from physical wear and outside influences.
Why the Other Options Are Wrong
Option B: Deferred maintenance
Option B, deferred maintenance, is postponed repair of wear and tear, a form of physical deterioration. The facts rule out physical wear and isolate a loss from inadequate bathroom and layout utility, which is a design deficiency.
Option C: Physical deterioration
Option C, physical deterioration, is wear and tear on the improvements. The facts state the loss is not from physical wear but from inadequate layout utility.
Option D: External obsolescence
Option D, external obsolescence, is a loss from influences outside the property. The question rules out outside influences and points to the home's own design.
Inside design, outside forces
Wear is physical, inside design flaws are functional, and outside forces are external. Too little is a deficiency; too much is a superadequacy.
How to use: Use this three-way sort to classify any depreciation question by cause.
Exam Tip
Name the cause first: a shortfall in design or layout utility is functional obsolescence, while postponed repair of worn items is physical deterioration.
Common Mistakes to Avoid
- -Calling a layout deficiency deferred maintenance or physical deterioration
- -Confusing a design deficiency with an outside influence
- -Assuming dated finishes alone prove functional obsolescence
Concept Deep Dive
Analysis
This question tests classification of depreciation by cause. The facts isolate a loss caused by inadequate bathroom count or layout compared with competing homes, and they rule out wear and outside influences. A loss caused by the design of the property itself is functional obsolescence, and here it is a deficiency rather than an excess.
Background Knowledge
Depreciation in the cost approach has three causes: physical deterioration, functional obsolescence and external (economic) obsolescence. Functional obsolescence comes from deficiencies, superadequacies or poor design within the property. Age or dated finishes alone do not quantify it, and more than one cause can be present at once.
Real-World Application
An appraiser finds that four-bedroom homes with one bathroom sell for less than similar homes with two bathrooms in the same neighborhood. She attributes the difference to functional obsolescence and supports the amount with paired sales.
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