An outdated floor plan in an otherwise sound home is best measured by:
Correct Answer
B) The price difference paired sales reveal
Why this is correct: The most direct and supportable measure of functional obsolescence (like an outdated floor plan) is the market's reaction, evidenced by the price difference between otherwise comparable properties with and without the flaw, as seen in paired sales analysis. Why the other choices are wrong: The cost of a complete interior renovation is wrong; renovation cost often exceeds the value loss and answers a different question. The original cost of the interior partitions is wrong; original cost does not measure current value loss. A standard percentage of the cost new is wrong; this is an arbitrary method, not market-derived. Exam tip: For obsolescence, seek market evidence first (paired sales, rent loss).
Why This Is the Correct Answer
Functional obsolescence is measured by the market's reaction, and paired sales matching dated layouts against contemporary ones isolate that price difference directly.
Why the Other Options Are Wrong
Option A: The cost of a complete interior renovation
Renovation cost frequently exceeds the value recovered for layout changes, so a cost-based deduction would overstate the loss.
Option C: The original cost of the interior partitions
Original partition cost is a historical figure with no bearing on current market behaviour.
Option D: A standard percentage of the cost new
A standard percentage substitutes convention for evidence the market has already provided.
Ask the Market, Not the Contractor
Ask the Market, Not the Contractor. What buyers deduct is the obsolescence; what it costs to fix is a different number.
How to use: Find pairs differing only in layout. That difference is the answer without any further computation.
Exam Tip
Cost to cure becomes the measure only where the cure is economically justified — where the value added at least matches the cost.
Common Mistakes to Avoid
- -Using renovation cost as the measure
- -Applying a conventional percentage
- -Referencing historical construction cost
Concept Deep Dive
Analysis
An outdated floor plan is a functional deficiency, and functional obsolescence is measured by what the market takes off the price — not by what fixing it would cost, not by what the partitions originally cost, and not by any conventional percentage. Paired sales are the instrument: match houses with the dated layout against otherwise comparable houses with contemporary plans, and the price difference is the obsolescence. The reason cost is the wrong measure here is that the relationship between renovation cost and value recovered is unreliable for layout changes — moving walls in a sound house is expensive and often returns considerably less than it costs, which means a cost-based deduction would overstate the loss. Original partition cost is worse still, being a historical figure with no bearing on current market behaviour. And a standard percentage substitutes convention for evidence in a situation where the market has already answered the question if the appraiser looks.
Background Knowledge
Functional obsolescence from design deficiencies is measured by market reaction, most directly through paired sales matching properties with and without the deficiency. Cost to cure is relevant only where it is recovered in value.
Real-World Application
An appraiser derives a $14,000 functional obsolescence deduction from four paired sales matching closed-plan houses against comparable open-plan ones.
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:
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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:
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