Verified market analysis attributes the subject’s value loss solely to a new competing center, not an internal deficiency. What category fits?
Correct Answer
D) External obsolescence.
The question attributes verified loss to new outside competition, which is external obsolescence. Reduced traffic alone does not physically wear the building, and no layout change is stated. Verify causation and account for market expectations rather than classifying every sale decline as external.
Why This Is the Correct Answer
Option D is correct because external obsolescence is a loss in value caused by negative influences outside the subject property, generally beyond the owner's control. New competition from another center is an outside market influence. The verified analysis rules out an internal deficiency, so neither physical nor functional categories fit.
Why the Other Options Are Wrong
Option A: Physical deterioration.
Option A, physical deterioration, is wear and tear or decay of the improvements. A new competing center does not physically wear the subject building, so this category does not fit.
Option B: Functional obsolescence.
Option B, functional obsolescence, is loss caused by the design of the property itself. The verified analysis says the loss is not from an internal deficiency, so a functional classification is not supported.
Option C: Curable functional obsolescence.
Option C, curable functional obsolescence, is a functional design problem whose cure cost is justified by the value gain. The loss here is not from the subject's design and cannot be cured by changing the subject building.
Outside cause, external loss
Ask where the cause lives: in the materials (physical), in the design (functional) or outside the property line (external).
How to use: Use this three-way location test to classify any depreciation item.
Exam Tip
Identify the source of the loss before looking at the answer choices. Competition, traffic patterns and neighborhood changes point to external obsolescence when they are verified as the cause.
Common Mistakes to Avoid
- -Classifying a market-driven loss as a design deficiency
- -Treating reduced traffic as physical wear
- -Labeling every decline in sales as external without verifying the cause
Concept Deep Dive
Analysis
This question tests classifying depreciation by its cause. The loss comes from a new competing center, which is outside the subject property, and not from any internal deficiency. A loss caused by forces outside the property is external obsolescence.
Background Knowledge
Depreciation has three broad categories: physical deterioration, functional obsolescence and external (economic) obsolescence. External obsolescence comes from factors outside the property, such as market conditions, competition, nuisances or changes in land use. Appraisers should verify that a loss is truly caused by the outside factor before classifying it.
Real-World Application
An appraiser values a neighborhood shopping center after a larger regional center opens nearby and draws away tenants. Lease and sales data show reduced rents tied to the new competition, so the appraiser treats the loss as external obsolescence rather than a building defect.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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