An older single-family residence has a 600-sq-ft finished basement with low ceilings (6'4”), no egress windows, and exposed utility piping — features inconsistent with current market expectations for finished basements. Comparable newer homes include basements with 7' ceilings, egress, drywall, and recessed utilities. The appraiser estimates it would cost $42,000 to upgrade the basement to current standards, and that such an upgrade would increase market value by $31,000. What is the appropriate treatment of this deficiency in the cost approach?
Correct Answer
B) Treat as curable functional obsolescence: $31,000.
A deficiency is curable functional obsolescence if the cost to cure is less than or equal to the resulting value increase (i.e., the cure is economically justified). Per USPAP Standards Rule 1-4 and the Appraisal Institute’s 'The Appraisal of Real Estate' (15th ed.), the amount of curable functional obsolescence is the lesser of the cost to cure or the value added — here, $31,000 (the value increase), since $42,000 > $31,000. Thus, the deficiency is curable, but only to the extent of the market-supported value gain. Option B correctly applies this principle. Option A mislabels as incurable; Option C incorrectly uses cost instead of value impact; Option D confuses functional inadequacy with physical wear.
Why This Is the Correct Answer
A deficiency is curable functional obsolescence if the cost to cure is less than or equal to the resulting value increase (i.e., the cure is economically justified). Per USPAP Standards Rule 1-4 and the Appraisal Institute’s 'The Appraisal of Real Estate' (15th ed.), the amount of curable functional obsolescence is the lesser of the cost to cure or the value added — here, $31,000 (the value increase), since $42,000 > $31,000. Thus, the deficiency is curable, but only to the extent of the market-supported value gain. Option B correctly applies this principle. Option A mislabels as incurable; Option C incorrectly uses cost instead of value impact; Option D confuses functional inadequacy with physical wear.
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Functional obsolescence caused by a deficiency is measured as curable when:
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An appraiser is estimating accrued depreciation for a 25-year-old apartment complex using the age-life method. The appraiser determines the total economic life to be 55 years and the effective age to be 18 years. If the reproduction cost new (RCN) of the improvements is $4,400,000, what is the amount of accrued depreciation?