A supported A/C deficiency costs $9,000 to cure and adds only $8,000 of value, with no other costs or benefits. How is it classified?
Correct Answer
B) Economically incurable functional obsolescence.
The $9,000 cure cost exceeds the stated $8,000 value benefit, so the deficiency is economically incurable under these facts. Comparing retrofit cost with new-construction cost is not the curability test. This conclusion does not make cure cost an automatic measure of market depreciation.
Why This Is the Correct Answer
Option B is correct because functional obsolescence is curable only if the cost to cure is equal to or less than the value added. A $9,000 cure that adds $8,000 fails that test, so the A/C deficiency is economically incurable functional obsolescence.
Why the Other Options Are Wrong
Option A: Curable, because a retrofit is physically possible.
Option A calls the item curable because a retrofit is physically possible. Curability in appraisal is an economic test, not a physical one; the $9,000 cost exceeds the $8,000 value added, so it is incurable.
Option C: Curable because retrofit costs more than installing it in new construction.
Option C calls it curable because retrofit costs more than installing in new construction. Comparing retrofit cost with new-construction cost is not the curability test; the test compares the $9,000 cure cost with the $8,000 value added.
Option D: No deficiency, because the cure fails the economic test.
Option D says there is no deficiency because the cure fails the economic test. Failing the economic test makes the deficiency incurable; it does not erase the deficiency or its loss in value.
Cure Pays or Stays
If the cure pays for itself (cost equal to or below value added), it is curable. If it does not pay, the problem stays as incurable.
How to use: Use this by comparing cost to cure with value added for any functional item.
Exam Tip
Ignore physical possibility when judging curability. Compare the two dollar figures given.
Common Mistakes to Avoid
- -Calling a deficiency curable just because it can be physically fixed
- -Concluding no deficiency exists when the cure is not economic
- -Comparing retrofit cost with new-construction cost instead of with value added
Concept Deep Dive
Analysis
This question tests the economic test for curability. A deficiency is curable when the cost to cure is equal to or less than the value added by curing it. Here the cure costs $9,000 but adds only $8,000, so it is not economically feasible to cure.
Background Knowledge
Functional obsolescence is split into curable and incurable based on whether curing it is economically justified. Incurable functional obsolescence can be either a deficiency or a superadequacy that is not economically feasible to cure.
Real-World Application
An appraiser finds a home lacks central air in a market where buyers expect it. A contractor quotes $9,000 to install it, but paired sales indicate only an $8,000 value increase, so she treats the deficiency as incurable.
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Previous Question
An external influence has reduced the annual net income of the subject property by $21,600. Market data indicate an 8% capitalization rate for this income loss, and all other economic factors are unchanged. What is the capitalized loss to the whole property, before allocation between site and improvements?
Next Question
Building cost new $360,000 has 20% total building loss. Separate site improvements are already as-is $42,000 and not in the building or vacant-site figure. Vacant-site value is $150,000. What total indication results?