Market evidence attributes a subject value loss to an outside employer closure rather than physical or design changes. What classification fits?
Correct Answer
A) External obsolescence with an economic cause.
A supported demand/value loss attributable to an outside employer shutdown is external with an economic cause. The announcement alone does not establish permanent loss to every property or its magnitude. Market participants’ expectations, subject relevance and timing must be analyzed.
Why This Is the Correct Answer
Option A is correct because external (economic) obsolescence is a loss in value caused by negative influences outside the property that the owner generally cannot control. A closure of an outside employer that reduces demand fits that description, and the stem says market evidence ties the loss to that cause rather than to physical or design changes.
Why the Other Options Are Wrong
Option B: Internal functional obsolescence, since demand changed.
Option B, internal functional obsolescence because demand changed, is wrong because functional obsolescence comes from design or utility problems within the property. A demand drop caused by an outside employer's closure is an external influence, not an internal defect.
Option C: Automatic exclusion of all temporary influences.
Option C, "automatic exclusion of all temporary influences," is wrong because appraisers do not simply exclude an influence by rule; they analyze market evidence about its effect, duration and relevance. Here the market evidence supports a loss, which is classified as external obsolescence.
Option D: Physical wear caused by fewer occupants.
Option D, physical wear caused by fewer occupants, is wrong because physical deterioration is wear or decay of the building itself. The stem rules out physical changes and ties the loss to an outside economic event.
Outside cause, outside label
If the cause sits outside the property line and the owner cannot fix it, the loss is external.
How to use: Use this when deciding whether a loss is physical, functional or external.
Exam Tip
Trace the cause of the loss: building wear is physical, design is functional, and outside forces are external. A change in demand from an outside event points to external.
Common Mistakes to Avoid
- -Labeling a demand-driven loss as functional obsolescence
- -Assuming an announced closure proves a permanent loss for all nearby properties without market analysis
- -Treating reduced occupancy as physical wear on the building
Concept Deep Dive
Analysis
This question tests classifying depreciation by its cause. A value loss caused by a major employer closing outside the property is not a defect in the building's design or condition; it is an outside economic influence. That makes it external obsolescence with an economic cause, provided market evidence supports the loss.
Background Knowledge
External obsolescence, sometimes called economic obsolescence, is a loss in value from factors outside the property, such as economic downturns, loss of employers or nearby nuisances. It is usually considered incurable by the owner, and its existence and size depend on market evidence about how buyers react.
Real-World Application
After a large plant closes in a small town, sales show homes nearby selling for less than before. An appraiser studies market data on the closure's effect and timing and, where a loss is supported, reports it as external obsolescence.
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Previous Question
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
Next Question
Total improvement cost new is $420,000, including separately treated short-lived cost $58,000 with supported loss $24,000. Apply an 18% physical-loss ratio only to the remaining long-lived cost. No other loss applies. What TOTAL physical depreciation results?