A three-bedroom home has only one bathroom while competing homes generally have at least two. Market evidence indicates adding a second bathroom would cost $35,000 but increase this home's value by only $20,000. How should this deficiency be classified?
Correct Answer
C) Incurable functional obsolescence
The stated $35,000 cure cost exceeds the $20,000 supported benefit, so the functional inadequacy is economically incurable on these facts. Bathroom count alone is not the curability test. This classification does not make the deficiency physical or external.
Why This Is the Correct Answer
Option C is correct because the shortfall in bathrooms is a functional inadequacy, and functional obsolescence is curable only if the cost to cure is equal to or less than the value added. Here $35,000 exceeds $20,000, so it is incurable functional obsolescence.
Why the Other Options Are Wrong
Option A: External obsolescence
Option A, external obsolescence, is wrong because the deficiency is inside the home's design, not caused by an off-site influence.
Option B: Physical deterioration
Option B, physical deterioration, is wrong because nothing is worn or damaged; the home lacks a feature the market expects, which is functional.
Option D: Curable functional obsolescence
Option D, curable functional obsolescence, is partly right that the problem is functional, but it is not curable because the $35,000 cost to cure exceeds the $20,000 value added.
Classify cause, then test cost
First name the cause: physical, functional or external. Then compare cost to cure with value added.
How to use: Use this two-step order on any question combining depreciation type and curability.
Exam Tip
Answer two questions in order: what kind of depreciation, then curable or incurable. An answer with the right type but wrong curability is still wrong.
Common Mistakes to Avoid
- -Calling a missing bathroom physical deterioration
- -Classifying it as curable without comparing cost to value added
- -Treating a design shortfall as external obsolescence
Concept Deep Dive
Analysis
This question tests classifying a deficiency by cause and curability. Having one bathroom where competitors have two is a functional inadequacy. Because adding a bathroom costs $35,000 but adds only $20,000, it is economically incurable.
Background Knowledge
Functional obsolescence results from deficiencies, superadequacies or poor design compared with market standards. It is curable when the cost to cure is equal to or less than the value added, and incurable when the cost is greater. The number of bathrooms alone does not decide curability; the cost and benefit do.
Real-World Application
In a subdivision where most three-bedroom homes have two baths, an appraiser finds that adding a bath to the subject would cost far more than buyers pay for it. The appraiser reports the shortfall as incurable functional obsolescence.
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