Verified market evidence isolates a loss from inadequate kitchen utility and bathroom layout, with no physical damage or off-site cause. What category fits?
Correct Answer
A) Functional obsolescence.
The stipulated market loss results from inadequate layout and utility, so it is functional obsolescence. Physical wear is a different cause, while an outside adverse influence is external obsolescence. Bathroom count alone does not establish a value loss without market support.
Why This Is the Correct Answer
Option A is correct because functional obsolescence is the loss of value caused by the design of the property itself. An inadequate kitchen and a poor bathroom layout are design and utility deficiencies inside the property. The facts rule out physical damage and outside influences, leaving functional obsolescence as the fitting category.
Why the Other Options Are Wrong
Option B: Physical deterioration.
Option B, physical deterioration, describes loss from wear, tear and deterioration of materials. The stem says there is no physical damage, and the loss comes from layout and utility, so this category does not fit.
Option C: External obsolescence.
Option C, external obsolescence, is a loss caused by negative influences outside the property. The stem states there is no off-site cause, so the loss cannot be external.
Option D: Incurable physical deterioration.
Option D, incurable physical deterioration, is still a form of physical wear. With no physical damage present and a design-based loss, neither the curable nor the incurable physical category applies.
Wear, design, outside
Physical is wear, functional is design, external is outside. Ask whether the cause is worn materials, the property's own layout, or something beyond the lot line.
How to use: Use this three-way sort whenever a question asks which depreciation category a described loss belongs to.
Exam Tip
Look for the cause stated in the stem; words like layout, design, utility or inadequate point to functional obsolescence when physical and off-site causes are ruled out.
Common Mistakes to Avoid
- -Labeling a design deficiency as physical deterioration
- -Calling any loss in an older house external obsolescence
- -Assuming a low bathroom count causes a loss without market support
Concept Deep Dive
Analysis
This question tests classification of depreciation by cause. The facts state a market-verified loss from inadequate kitchen utility and bathroom layout, with no physical damage and no off-site cause. A loss caused by the design of the property itself is functional obsolescence.
Background Knowledge
Accrued depreciation is divided into physical deterioration, functional obsolescence and external obsolescence. Functional obsolescence arises from deficiencies or superadequacies in design, layout or utility within the property. Any such loss should be supported by market evidence rather than assumed from a feature count alone.
Real-World Application
An appraiser finds that a four-bedroom house with one small bathroom and a cramped galley kitchen sells for less than similar homes with better layouts. Paired sales confirm the discount, and the appraiser reports it as functional obsolescence in the cost approach.
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