What is needed for an income-based external-loss estimate?
Correct Answer
D) A supported attributable income-loss model and a compatible rate or factor.
Measure the attributable loss on an appropriate net-income or explicitly compatible gross-loss basis, with supported duration, risk and rate/factor. Gross rent divided by a net-income cap rate is not automatically compatible. A tax schedule or original invoice alone does not establish market loss.
Why This Is the Correct Answer
Option D is correct because an income-based estimate capitalizes a supported attributable income loss using a compatible rate or factor. Both the rent difference and the capitalization rate should be market supported, and the income basis and rate must match, for example net income with a net-income capitalization rate.
Why the Other Options Are Wrong
Option A: The original construction invoice, trended forward to the effective date.
Option A is wrong because the original construction invoice trended forward to the effective date is a cost measure. It does not show the income loss caused by an external influence.
Option B: A tenant statement treated as proof of any requested dollar loss.
Option B is wrong because it treats a tenant statement as proof of any requested dollar loss. An income-based estimate requires a supported, attributable income loss, not an unverified claim.
Option C: The owner’s tax depreciation schedule for the improvements.
Option C is wrong because the owner's tax depreciation schedule is an accounting allocation of cost. It does not measure the market loss in income or value caused by outside conditions.
Matched loss, matched rate
Capitalize a supported income loss with a rate built on the same income basis, net with net and gross with gross.
How to use: Use this to check that an income-based obsolescence estimate pairs the loss and the rate correctly.
Exam Tip
Look for the answer that requires both a supported income loss and a compatible rate or factor; cost and tax figures do not measure income loss.
Common Mistakes to Avoid
- -Capitalizing a gross rent loss with a net-income capitalization rate
- -Accepting an unverified tenant claim as the measure of loss
- -Using tax depreciation or historical cost as evidence of external loss
Concept Deep Dive
Analysis
This question tests what is needed to measure external obsolescence by capitalizing an income loss. The appraiser needs a supported estimate of the income loss attributable to the outside influence and a rate or factor compatible with that income measure. Cost records, tax schedules and unverified statements do not measure a market loss.
Background Knowledge
External obsolescence can be measured by capitalizing the income loss attributable to the external cause. The rent or income difference and the capitalization rate or multiplier should both be market supported and compatible with each other. Duration and risk of the loss also affect the appropriate rate or factor.
Real-World Application
An appraiser values a small retail building after a highway rerouting reduced traffic. Using market rents before and after the change, the appraiser estimates the attributable net income loss and capitalizes it with a market-derived rate to measure external obsolescence.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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