A house has no central air in a market where nearly all sales have it. Installing costs $9,000; new construction would include it for $6,000; paired sales show buyers pay $8,000 more with A/C. This deficiency is:
Correct Answer
B) Curable, measured at the $3,000 excess of installing now over building in
Why this is correct: Curability is tested by whether the cost to cure ($9,000) is less than or equal to the value added ($8,000). Here, cost exceeds value by $1,000, making it a close case. The functional penalty is the excess of retrofit cost over new-in cost ($9,000 - $6,000 = $3,000). Why the other choices are wrong: "Curable — the $3,000 excess cost is less than nothing, so cure is automatic" misinterprets; the $3,000 is a penalty, not a reason for automatic cure. "Incurable, since installation exceeds the new-construction figure" is too absolute; the test is cost vs. value added, not just vs. new cost. "Nonexistent, because cost exceeds one contribution estimate" is false; a deficiency exists if market pays less. Exam tip: For curable functional obsolescence, test: Cost to Cure ≤ Value Added.
Why This Is the Correct Answer
Option B is the only choice that states the correct measurement rule, the excess of retrofit cost over build-in cost, and applies it to the right pair of numbers to reach $3,000. It also treats the missing system as a real, quantifiable deficiency rather than dismissing it. Be aware of the tension the item builds in: the strict curability test compares the $9,000 cost to cure against the $8,000 the market pays, and by that test the cure does not quite pay for itself, which makes this a borderline case the item resolves in favor of curable. What the question is grading is whether you know the retrofit-minus-build-in measure.
Why the Other Options Are Wrong
Option A: Curable — the $3,000 excess cost is less than nothing, so cure is automatic
The reasoning here is incoherent: a $3,000 excess is not 'less than nothing,' and no cure is ever automatic. Curability is established by testing whether the money spent comes back in value, and only then is the loss measured. This option pairs the right number with a rationale that would let a candidate skip the analysis entirely.
Option C: Incurable, since installation exceeds the new-construction figure
Retrofit cost almost always exceeds build-in cost, because a finished house must be opened up to accept the new system. If exceeding the new-construction figure made an item incurable, virtually every added feature would be incurable and the category would be meaningless. The real test compares cost to cure against value added, not against build-in cost.
Option D: Nonexistent, because cost exceeds one contribution estimate
The paired sales are direct evidence that buyers pay $8,000 more for an otherwise similar house with central air, which establishes that a deficiency exists. Cost exceeding contribution affects whether curing is economically rational; it does not make the shortfall disappear. Denying the deficiency would leave the cost approach out of line with the market.
Retrofit Minus Build-In
For a missing item that should have been there, the penalty is what it costs to add it now minus what it would have cost to build it in. The gap is the price of the mistake, and the gap alone is the obsolescence.
How to use: Label the three numbers in the stem before answering: cost now, cost if built in, and market contribution. Subtract the second from the first for the measure, and compare the first with the third to test curability.
Exam Tip
Do not grab the first plausible number. These items always supply one figure more than you need, and the extra figure is there to test whether you know which rule uses which value.
Common Mistakes to Avoid
- -Using the full installation cost as the obsolescence rather than the excess over build-in cost
- -Skipping the curability test and assuming every fixable item is curable
- -Mixing up the market contribution figure with the cost figures when setting up the calculation
Concept Deep Dive
Analysis
This is the classic functional obsolescence problem caused by a deficiency requiring the addition of an item that was not originally installed. Three different numbers appear, and each has a distinct job: $9,000 is the cost to install the system now, $6,000 is what the same system would have cost had it been built in during construction, and $8,000 is the market's measured contribution from paired sales. The measure of the loss for a curable deficiency of this type is the excess of installing it now over including it at construction, here $9,000 minus $6,000, or $3,000, because that excess is the penalty for the item having been left out. Curability itself is tested by comparing the full cost to cure against the value the cure adds, which is why the $8,000 paired-sale figure appears in the stem.
Background Knowledge
You need the taxonomy of functional obsolescence: curable versus incurable, and deficiency requiring an addition, deficiency requiring substitution or modernization, and superadequacy. You also need the measurement rules for each, plus the curability test comparing cost to cure with value added.
Real-World Application
Valuing an older home without central air in a market where every comparable has it, the appraiser obtains a current installation bid, checks a cost service for the build-in figure, and supports the buyer premium with two matched pairs before deciding how to treat the item in the cost approach.
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A certified general appraiser is valuing a 40-year-old office building affected by chronic noise and air pollution from a nearby airport. The appraiser estimates total external obsolescence at $620,000 using the sales comparison approach with paired sales. The site value, as confirmed by vacant land sales, is $380,000, and the reproduction cost new of the improvements is $1,850,000. Physical and functional depreciation total $310,000. What is the indicated value of the improvements after accounting for all forms of depreciation, including external obsolescence?