A custom-built single-family residence includes a 1,200-square-foot indoor lap pool with full filtration, dehumidification, and climate control systems. The owner reports annual operating costs of $18,400, and only 3% of comparable high-end homes in this market include such a feature. A recent sale of a similar home without the pool closed at $1.42 million; the subject itself sold three months earlier for $1.39 million after extended marketing and documented buyer reluctance, and the market has been flat over that three-month interval. The pool's reproduction cost new is $215,000. Measuring the loss by market extraction rather than by a cost-based computation, what loss in value does the evidence support for this superadequacy?
Correct Answer
B) $30,000, the penalty the paired sales indicate the market attaches to the pool.
Why this is correct: Market extraction measures a loss in value by comparing what the market paid for property with the feature against what it paid for property without it. A similar home without the pool closed at $1.42 million; the subject, with the pool, closed at $1.39 million three months earlier in a flat market, so the two prices are directly comparable and no time adjustment intervenes. The $30,000 spread — corroborated by the extended marketing time and the documented buyer reluctance — is what the market says the pool's presence costs this property. Why the other choices are wrong: '$215,000, because the entire cost of the superadequate item is deducted from reproduction cost new' substitutes cost for value, which is the error the reproduction-cost figure in the stem is there to invite. A cost-based charge for a superadequacy is built differently in any event — the cost of the excess item, less whatever the market does pay for it, plus the capitalised excess operating expense — which is exactly why this question names the method it wants. '$0, because superadequacies are never considered functionally obsolete unless they cause physical damage' is false: a superadequacy is a recognised cause of functional obsolescence precisely because the market will not pay for the excess. '$18,400, equal to one year's excess operating cost' confuses an annual expense with a capitalised loss; a recurring cost becomes a value effect only after it is capitalised, and one year of it is not that figure. Exam tip: when a stem hands you a cost, an annual expense and a pair of sale prices, read the question for which one it is asking about. Only the sale prices measure value.
Why This Is the Correct Answer
Market extraction compares what the market paid with the feature against what it paid without it. The $1.42 million sale without the pool and the subject's own $1.39 million sale with it sit three months apart in a flat market, so the prices are directly comparable and the $30,000 spread is attributable to the pool. Extended marketing time and documented buyer reluctance corroborate the direction of the penalty, so it is not an artefact of a single transaction. That $30,000 is the loss in value the evidence supports.
Why the Other Options Are Wrong
Option A: $215,000, because the entire cost of the superadequate item is deducted from reproduction cost new.
This answers a value question with a cost number. Reproduction cost new tells you what building the lap pool required, not what buyers will pay for a house that has one, and for a superadequacy the two diverge sharply by definition. A cost-based charge would also not be the bare $215,000 — it would net off whatever the market does pay for the feature and add the capitalised excess operating expense — so this figure is not the right answer under either method.
Option C: $0, because superadequacies are never considered functionally obsolete unless they cause physical damage.
This is simply false as a matter of appraisal theory. A superadequacy is one of the standard causes of functional obsolescence, and physical damage has nothing to do with it: the loss arises because the market will not pay for capacity or quality it did not ask for. Here the market has priced the penalty explicitly.
Option D: $18,400, equal to one year’s excess operating cost, as functional obsolescence is measured annually.
This confuses an annual expense with a loss in value. An operating cost affects value only once it is capitalised over the period a buyer expects to bear it, and a single year's figure is not that capitalisation. The $18,400 is in the stem to see whether you will hand back an income figure when the question asks for a value figure.
Cost builds it, the market prices it
Say it in that order: cost is what building it took, expense is what running it takes, and the market's price effect is the only one of the three that is a value. When a question asks for a loss in value, the answer has to come from prices buyers actually paid.
How to use: When a superadequacy stem gives you three numbers, label each one — cost, expense, price effect — before you look at the options. Then read the question for which label it wants; a well-written item will name the method, and the method decides the number.
Exam Tip
The largest number in a superadequacy question is almost always the cost figure, and it is almost always the trap. When the question says market extraction, the answer comes from the sale prices and nothing else.
Common Mistakes to Avoid
- -Deducting the full reproduction cost of the excess item as though cost and value were the same figure
- -Treating one year of excess operating expense as the loss in value instead of capitalising it
- -Assuming a superadequacy is not obsolescence unless something is physically wrong with the improvement
- -Mixing a market-extracted figure with a cost-based charge for the same item, which double-counts the loss
Concept Deep Dive
Analysis
A superadequacy is an improvement that exceeds what the market requires, and the excess produces functional obsolescence because buyers will not pay for it. The item tests the difference between three quantities a stem can dangle in front of you: what the feature cost to build, what it costs to run each year, and what its presence does to the price. Only the third is a measure of value, and the question names the method — market extraction — that reads it directly off the sales. A cost-based measure of the same superadequacy is a different computation with a different answer, which is why the method has to be stated before the question has one right answer.
Background Knowledge
You need to know that depreciation can be measured either by extraction from market sales or by a cost-based computation, that the two are different routes with different arithmetic, and that a superadequacy causes functional obsolescence because the market declines to pay for the excess. You also need to be able to tell a cost, an annual expense and a price effect apart when a stem supplies all three.
Real-World Application
Indoor lap pools, oversized shops and elaborate home theatres all show up as superadequacies in high-end appraisal work. When a matched sale is available the extraction is short and defensible; when it is not, the appraiser has to build the cost-based measure and disclose how the excess operating expense was capitalised, which is a far longer paragraph in the report.
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:
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