A well-kept house loses value because a rendering plant opened a half mile upwind. What kind of depreciation is this, and can the owner cure it?
Correct Answer
A) External obsolescence, and it is essentially always incurable
Why this is correct: External obsolescence is caused by factors outside the property boundaries (like a nearby nuisance) and is nearly always incurable by the property owner because they cannot control the external source. Why the other choices are wrong: "Functional obsolescence, curable with a whole-house air filtration system" is wrong because the problem is external, not a design flaw inside the property; filtration masks but does not cure the loss in value. "Physical deterioration, curable with maintenance" is wrong because the property is well-kept; the loss is not from wear and tear. "External obsolescence, curable by rezoning" is wrong because rezoning the subject property does not remove the external nuisance. Exam tip: External = outside the property lines. Incurable = owner can't fix it. They combine here.
Why This Is the Correct Answer
The cause sits outside the property lines and beyond the owner's control, which makes it external obsolescence, and that same fact makes it essentially always incurable. An owner can maintain, remodel, or rebuild without touching the source of the loss. The qualifier essentially is appropriate because the source could theoretically be removed by someone else, such as the plant closing or a regulator forcing abatement, but nothing the owner does will cure it. Recognizing incurability also tells the appraiser to measure the loss from market evidence rather than from any cost figure.
Why the Other Options Are Wrong
Option B: Functional obsolescence, curable with a whole-house air filtration system
Functional obsolescence requires a defect inside the property, in design, layout, or components, and this house has none. Air filtration might make the interior more pleasant, but it would not restore the value lost to a neighborhood-wide nuisance, since buyers price the location as well as the house. Treating a mitigation measure as a cure confuses reducing a symptom with removing the cause.
Option C: Physical deterioration, curable with maintenance
Physical deterioration is loss from wear, use, and the elements, and the stem expressly describes the house as well kept. Maintenance addresses deterioration, which is not what happened here. This option is included to test whether the candidate reads the well-kept qualifier as the exclusion it is meant to be.
Option D: External obsolescence, curable by rezoning
Rezoning the subject property does nothing about a plant already operating a half mile away, and in any event a single owner cannot rezone at will. Even a rezoning of the plant's parcel would not remove an existing operation, which would likely continue as a legal nonconforming use. The option correctly identifies the category and then attaches an impossible cure.
Outside the Fence, Beyond the Fix
Point at the cause. If your finger crosses the property line, it is external, and if the owner cannot reach it, it is incurable. Well kept in a stem is a deliberate signal ruling out physical deterioration.
How to use: Read the stem for a phrase excluding one category, such as well kept or recently built, then locate the cause relative to the boundary. The remaining category is the answer, and external almost always pairs with incurable.
Exam Tip
Check how site value was derived before deducting external obsolescence from the improvements. If land comparables came from the same affected area, the loss is already captured and deducting again double counts.
Common Mistakes to Avoid
- -Classifying a neighborhood nuisance as functional obsolescence
- -Treating a mitigation measure as a cure for an external cause
- -Double counting external obsolescence already embedded in site value
Concept Deep Dive
Analysis
Depreciation is classified by where its cause originates, and the stem is constructed to make that origin unmistakable. The house is well kept, which forecloses physical deterioration. Nothing about its design has changed, which forecloses functional obsolescence. What changed is a half mile away and beyond the owner's control: a rendering plant generating odor carried by the prevailing wind. That is external obsolescence with a locational cause, the classic category alongside highways, landfills, rail yards, and high-tension lines. Because the source lies outside the property boundary, no expenditure the owner makes on the property can remove it, which is why external obsolescence is described as essentially always incurable. Measurement is by paired sales comparing otherwise similar homes inside and outside the affected area, or by capitalizing a rent differential. The appraiser must also decide how the loss allocates between site and improvements, and confirm that the site value used in the cost approach was not itself drawn from comparables already reflecting the same influence.
Background Knowledge
You need the three categories of depreciation, the locational and economic subdivisions of external obsolescence, and the general rule that external obsolescence is incurable at the property level. You should also know the measurement techniques of paired sales and capitalized rent loss, and the caution about double counting when site value already reflects the external influence.
Real-World Application
An appraiser working downwind of a rendering plant pairs sales inside and outside the odor-affected area, isolates a consistent discount, allocates it between site and improvements, verifies her land comparables came from unaffected areas, and reports the loss as incurable external obsolescence.
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:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Previous Question
A commercial property's value falls after a competing center opens nearby. This loss is:
Next Question
Paired sales show homes adjacent to a new commercial development sell for $28,000 less. The subject's land represents 30% of total value. The improvements' share of the external obsolescence is: