Which stated condition represents a market-recognized functional deficiency?
Correct Answer
A) An undamaged electrical system with insufficient capacity for typical market use.
The stipulated modern-use electrical deficiency is functional because insufficient capacity reduces utility despite good physical condition. Physical damage and normal wear are different causes; adverse location influences are external. An electrical upgrade can otherwise involve physical repairs, so the cause must be specified.
Why This Is the Correct Answer
Option A is correct because an undamaged electrical system with insufficient capacity for typical market use reduces utility despite good physical condition. That is a functional deficiency: the property no longer meets market expectations even though nothing is broken. Equipment can still be in use while its market value is reduced by functional obsolescence.
Why the Other Options Are Wrong
Option B: Normal wear of the flooring from daily use.
Option B describes normal wear of the flooring from daily use. Wear is physical deterioration, not a functional deficiency.
Option C: A verified adverse neighborhood influence located outside the property boundaries.
Option C describes a verified adverse neighborhood influence outside the property boundaries. Influences from outside the property are external obsolescence, not functional.
Option D: Traffic noise from an adjacent highway.
Option D describes traffic noise from an adjacent highway. Noise from an outside source is a location influence, which is external obsolescence.
Worn, outdated, or outside
Physical is worn, functional is outdated or poorly designed, and external comes from outside the property lines.
How to use: Use this to sort any depreciation item into its correct category.
Exam Tip
Ask whether the problem is wear, a design or capacity shortfall in the property, or something outside the boundaries.
Common Mistakes to Avoid
- -Calling normal wear a functional problem
- -Treating outside noise or neighborhood issues as functional obsolescence
- -Assuming items in good condition cannot suffer depreciation
Concept Deep Dive
Analysis
This question tests identifying functional obsolescence by its cause. Functional obsolescence is a loss in utility from design or capacity shortfalls within the property, even when components are in good physical condition. An undamaged electrical system with insufficient capacity for typical use fits that definition, while wear and outside influences do not.
Background Knowledge
Depreciation in the cost approach has three causes: physical deterioration from wear and damage, functional obsolescence from design or capacity issues, and external obsolescence from outside influences. Classifying the cause correctly matters because it affects how the loss is measured and whether it can be cured.
Real-World Application
An appraiser inspects an older home with well-kept wiring but only a small electrical service that cannot support modern appliances. Buyers in the market discount homes with such limited service. The appraiser treats the loss as functional obsolescence in the cost approach.
More Cost Approach Questions
Which stated cause of supported value loss is external?
Improvement cost new is $450,000. Separately supported improvement depreciation deductions of $45,000, $25,000, $15,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $125,000, already reflecting any site losses. What total indicated value results?
Which two depreciation categories may each be classified as curable or incurable by comparing the cost to remedy a deficiency with the value gained?
Improvement cost new is $800,000. Separately supported improvement depreciation deductions of $120,000, $80,000, $40,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
The principle of anticipation in real estate valuation states that:
Which highest-and-best-use criterion addresses whether a proposed use is allowed by zoning and applicable legal restrictions?
Three comparables produce adjusted indications of $312,000, $309,000 and $315,000, requiring gross adjustments of 9%, 14% and 22% respectively. Verification also establishes that the first sale is the closest competitive substitute and its adjustments are better supported than the other two. Which indication deserves the most weight on those facts?
When reconciling value indications from the three approaches to value, an appraiser should:
A property sold at a cash-equivalent price of $1,062,500. Its stabilized annual NOI is $85,000. What is the indicated overall rate?
In reconciliation, an appraiser should:
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