A house has one bathroom in a market that expects two and a half. What kind of depreciation is this?
Correct Answer
B) Functional obsolescence — a deficiency
Why this is correct: Functional obsolescence is a loss in value due to a design flaw or inadequacy relative to market standards. A shortage of bathrooms is a classic functional deficiency. Why the other choices are wrong: "Physical deterioration of the plumbing" is wrong because the problem is not wear and tear; the bathroom may be in perfect condition. "External obsolescence from market tastes" is wrong because external obsolescence originates outside the property boundaries. "No depreciation, since the bathroom works" is wrong because depreciation includes functional loss; market value is reduced by the inadequacy. Exam tip: Functional obsolescence = design problem inside the property. Count the features against market expectations.
Why This Is the Correct Answer
Option B is right because the loss arises from an inadequacy in the design of the improvements relative to what buyers in this market expect, which is the definition of a functional deficiency. The bathroom count is a feature of the structure itself, not a condition problem and not something imposed from outside the lot lines. Measuring the loss then depends on whether adding a bath is economically justified: if the cost to cure is recovered in value, the deficiency is curable and measured at cost to cure; if not, it is incurable and measured by the capitalized rent loss or the value differential the market shows. Either way the classification comes first.
Why the Other Options Are Wrong
Option A: Physical deterioration of the plumbing
Physical deterioration requires something to have worn out, corroded, or decayed, and nothing in the fact pattern says the existing plumbing is in poor condition. A brand-new bathroom in perfect working order still leaves the house short of the market standard, which is the tell that the loss is not physical. Confusing condition with adequacy is the most common classification error in the cost approach.
Option C: External obsolescence from market tastes
External obsolescence originates outside the property boundaries - a rezoning, a new highway, an employer closing, a neighborhood in decline. Market tastes are the yardstick against which functional adequacy is measured, not an external force acting on this parcel. If evolving preferences alone made a loss external, nearly every functional item would be misclassified.
Option D: No depreciation, since the bathroom works
Depreciation in appraisal is a loss in value from any cause, not a statement about whether something works. A fully operational single bathroom still causes buyers to pay less than they would for a comparable house with the expected count, and that difference is the depreciation. Functional utility, not mechanical function, is the test.
Worn, wrong, or outside
Every dollar of depreciation answers one of three questions. Is it worn out? Physical. Is it wrong for the market - too little or too much? Functional. Is the cause outside the lot lines? External. Worn, wrong, or outside.
How to use: Read the stem for the source of the loss before looking at the answers. A condition word points to physical, a design or count word points to functional, and anything beyond the property boundary points to external. Then decide deficiency or superadequacy if the answer is functional.
Exam Tip
Watch for stems that describe something in perfect condition but out of step with the market; that combination is designed to catch candidates who default to physical deterioration.
Common Mistakes to Avoid
- -Classifying an adequacy problem as physical deterioration because plumbing is involved
- -Calling changing market preferences external obsolescence
- -Assuming a working feature contributes no depreciation
- -Asserting a market standard without paired-sale or other evidence
Concept Deep Dive
Analysis
This question tests the classification of accrued depreciation into its three causes, which is the backbone of the breakdown method in the cost approach. Physical deterioration is loss from wear, tear, decay, and the action of the elements - things that happen to materials over time. Functional obsolescence is loss caused by a defect in the structure, materials, or design of the improvements themselves, measured against what the market currently expects; it divides into deficiencies, where something needed is missing or inadequate, and superadequacies, where something exceeds what the market will pay for. External obsolescence is loss caused by factors outside the property boundaries, such as an adjacent nuisance or a decline in the local economy. A single bathroom in a market that expects two and a half is a shortfall in the improvements measured against market standards, which places it squarely in the functional category as a deficiency. Note that the market standard, not the appraiser's preference, defines the shortfall, so the two-and-a-half-bath expectation has to be supported by evidence.
Background Knowledge
You need the three causes of accrued depreciation and the curable and incurable subdivisions within physical deterioration and functional obsolescence, plus the two forms of functional obsolescence - deficiency and superadequacy. You should also know that market standards must be established from evidence rather than assumed, and that the classification determines the measurement technique used in the breakdown method.
Real-World Application
An immaculately maintained mid-century three-bedroom with a single bath sells for measurably less than otherwise similar homes with two baths in the same subdivision. The appraiser documents that differential from paired sales and reports it as functional obsolescence rather than treating the tidy bathroom as evidence of no depreciation.
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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