Qualified condition information attributes a worn HVAC system’s expected replacement within two years to physical wear; a newly replaced roof has a much longer expected service life. Which depreciation cause is being examined?
Correct Answer
D) Physical deterioration
Under the stated wear-based findings, the component condition analysis concerns physical deterioration. Functional loss concerns inadequate or excessive utility relative to market needs, such as a superadequacy, and external loss comes from outside influences. Remaining physical service life alone does not establish the property’s remaining economic life.
Why This Is the Correct Answer
Option D is correct because the analysis concerns components losing service life through physical wear, which is physical deterioration. Wearing-out equipment, peeling paint and similar items are standard examples of physical deterioration. Comparing the worn HVAC to the new roof is an analysis of each component's remaining physical life.
Why the Other Options Are Wrong
Option A: External obsolescence
Option A, external obsolescence, is a loss caused by influences outside the property, such as market or location factors. A worn HVAC system is a physical condition of the improvement, not an outside influence.
Option B: Functional obsolescence
Option B, functional obsolescence, is a loss from inadequate or excessive utility relative to market needs, such as a poor floor plan. The facts describe wear, not a design problem.
Option C: Superadequacy
Option C, a superadequacy, is a component whose cost or capacity exceeds what the market will pay for, a form of functional obsolescence. A worn HVAC system nearing replacement is a wear problem, not an over-improvement.
Wear Equals Physical
If something is wearing out, it is physical; if it is badly designed or overbuilt, it is functional; if the cause is outside, it is external.
How to use: Use this three-way sort to classify any depreciation example.
Exam Tip
Identify the cause of the loss first. Wear and tear points to physical deterioration, while an over-improvement such as a superadequacy is a design issue.
Common Mistakes to Avoid
- -Calling worn equipment functional obsolescence
- -Confusing a worn component with an over-improvement
- -Equating a component's physical life with the property's economic life
Concept Deep Dive
Analysis
This question tests which category of depreciation applies when components wear out from use. Qualified findings attribute the HVAC replacement need to physical wear, which is physical deterioration. Functional obsolescence, including a superadequacy, and external obsolescence come from design problems or outside influences, not wear.
Background Knowledge
Depreciation in the cost approach is divided into physical deterioration, functional obsolescence and external (economic) obsolescence. Physical deterioration reflects wear and tear and can be analyzed component by component, separating short-lived items like HVAC from long-lived ones. A component's remaining physical life does not by itself establish the remaining economic life of the whole property.
Real-World Application
In a cost approach, an appraiser relies on a contractor's report that the furnace and air conditioner will need replacement within two years, while the roof was just replaced. The appraiser estimates physical deterioration separately for the short-lived HVAC and the long-lived roof.
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Under Fannie Mae Selling Guide B4-1.3-05, gross building area (GBA) is the total finished area including interior common areas based on exterior measurements; it is the most common comparison for two- to four-unit properties; it must include finished above- and below-grade living areas; and it cannot count exterior common areas such as open stairways. A two-unit subject has finished above-grade living area of 2,400 square feet and finished below-grade living area of 800 square feet (both measured consistently on an exterior basis, with interior common hallways already reflected in those exterior measurements). An open exterior stairway serving the units measures 90 square feet. What GBA should be used for comparison?
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For Fannie Mae assignments under the cited B4-1.3-05 policy, which contrast between covered single-family measurement and the usual 2–4 unit GBA comparison is correct?