A neighborhood's sole employer announces a permanent shutdown and local prices sag. For the cost approach this is best classified as:
Correct Answer
B) External obsolescence with an economic cause
Why this is correct: External obsolescence is a loss in value from causes outside the property itself. It can be locational (e.g., bad neighbor) or economic. The permanent loss of a major employer is an economic cause that reduces demand and value for all properties in the area, making it external obsolescence. Why the other choices are wrong: "Functional obsolescence" relates to flaws within the property's design or features. "Temporary market noise, excluded from the analysis" is wrong; a permanent plant closure is a lasting economic fact that must be considered. "Physical deterioration accelerated by vacancy" describes physical wear and tear, not the root economic cause. Exam tip: External obsolescence originates outside the property lines and is often incurable.
Why This Is the Correct Answer
Why this is correct: External obsolescence is a loss in value from causes outside the property itself. It can be locational (e.g., bad neighbor) or economic. The permanent loss of a major employer is an economic cause that reduces demand and value for all properties in the area, making it external obsolescence. Why the other choices are wrong: "Functional obsolescence" relates to flaws within the property's design or features. "Temporary market noise, excluded from the analysis" is wrong; a permanent plant closure is a lasting economic fact that must be considered. "Physical deterioration accelerated by vacancy" describes physical wear and tear, not the root economic cause. Exam tip: External obsolescence originates outside the property lines and is often incurable.
More cost-approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A 45-year-old office building has undergone multiple high-quality renovations, including HVAC replacement, seismic retrofitting, and full interior modernization. Its functional layout remains competitive with new construction, and it occupies a stable, well-located corridor. The appraiser estimates its total economic life at 70 years. Which estimate of effective age is most supportable under USPAP and recognized cost approach methodology?
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
An appraiser is estimating accrued depreciation for a commercial office building using the age-life method. The building was constructed in 1992 and has a total economic life of 60 years. As of the appraisal date in 2024, the appraiser determines the property’s effective age is 36 years due to consistent maintenance, modernized systems, and favorable market perception. What is the percent of accrued depreciation indicated by the age-life method?
Which event would RAISE a building's effective age relative to last year's estimate?
Two identical houses were built the same year; one has been meticulously maintained, the other neglected. Their age-life analyses differ because:
Which statement is MOST consistent with USPAP Standards Rule 6 regarding the identification and treatment of external obsolescence in the cost approach?
A 40-year-old industrial warehouse has undergone no major renovations and suffers from outdated electrical systems, inefficient insulation, and obsolescent loading dock design. Market evidence indicates similar properties typically exhibit functional obsolescence reducing utility by 15% and external obsolescence reducing value by 10%. If the appraiser uses the age-life method with a total economic life of 50 years, how should effective age be adjusted to reflect these conditions?
In developing an age-life depreciation estimate, an appraiser assigns an effective age of 16 years and a total economic life of 40 years. Later, the appraiser discovers that comparable properties in the same submarket have recently sold with effective ages averaging 12 years and total economic lives averaging 45 years — and those sales exhibited superior energy efficiency and adaptive reuse features. What is the appraiser’s USPAP-compliant obligation regarding the original effective age estimate?
The age-life method expresses depreciation as:
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Previous Question
Using extraction, three sales of 20-year-old homes show about 20% total depreciation. The implied straight-line annual rate is:
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A 15-year-old house has cost new of $420,000 with short-lived items totaling $58,000 in cost and $24,000 of depreciation charged against them. If the long-lived ratio is 18%, total physical depreciation is: