Paired sales show houses backing the new freeway sell for $30,000 less. The subject's land-to-value ratio is 25%. How much external obsolescence applies to the improvements?
Correct Answer
C) $22,500, after allocating a quarter to the land
Why this is correct: External obsolescence affects the entire property value. In the cost approach, the land is already valued in its impaired condition. Therefore, only the portion of the total loss attributable to the improvements is deducted as depreciation. If the land-to-value ratio is 25%, the improvement ratio is 75%. The improvement's share of the $30,000 loss is $30,000 * 0.75 = $22,500. Why the other choices are wrong: $30,000 assigned entirely to improvements would ignore the land's share of the loss. $7,500 is the land's share (25%), not the improvement's. $15,000 assumes a 50/50 split, which is not based on the given ratio. Exam tip: To allocate external obsolescence to improvements: Total Loss in Value * (1 - Land Ratio). This prevents double-counting the land's loss.
Why This Is the Correct Answer
Why this is correct: External obsolescence affects the entire property value. In the cost approach, the land is already valued in its impaired condition. Therefore, only the portion of the total loss attributable to the improvements is deducted as depreciation. If the land-to-value ratio is 25%, the improvement ratio is 75%. The improvement's share of the $30,000 loss is $30,000 * 0.75 = $22,500. Why the other choices are wrong: $30,000 assigned entirely to improvements would ignore the land's share of the loss. $7,500 is the land's share (25%), not the improvement's. $15,000 assumes a 50/50 split, which is not based on the given ratio. Exam tip: To allocate external obsolescence to improvements: Total Loss in Value * (1 - Land Ratio). This prevents double-counting the land's loss.
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