The cost approach concept of external obsolescence is most closely related to which principle?
Correct Answer
A) Externalities
External obsolescence, a loss from influences outside the property, is closely related to the principle of externalities, which describes positive and negative effects from uses outside the owner’s control.
Why This Is the Correct Answer
Option A is correct because the concept of external obsolescence in the cost approach is closely related to the principle of externalities. Both deal with value effects that originate outside the property. External obsolescence is the negative side of externalities applied as depreciation in the cost approach.
Why the Other Options Are Wrong
Option B: Anticipation
Option B, Anticipation, holds that value reflects the expected future benefits of ownership. It concerns future benefits, not losses caused by influences outside the property, so it is not the principle most closely tied to external obsolescence.
Option C: Contribution
Option C, Contribution, measures the value a component adds to the whole property. It relates more to evaluating features of the property itself than to outside influences, so it is not the closest match for external obsolescence.
Option D: Substitution
Option D, Substitution, holds that a buyer will pay no more than the cost of an equally desirable substitute. It underlies the cost and sales comparison approaches generally but does not specifically describe losses from outside influences.
External Means Externalities
Both words start with external: external obsolescence is the cost approach loss, externalities is the principle. Outside causes link them.
How to use: Use this word match when a question pairs external obsolescence with a principle of value.
Exam Tip
Match depreciation types to the source of the loss. A loss originating outside the property points to externalities.
Common Mistakes to Avoid
- -Linking external obsolescence to the principle of contribution
- -Treating external obsolescence as a defect in the property itself
- -Assuming externalities can only be negative
Concept Deep Dive
Analysis
This question tests the link between a cost approach concept and a principle of value. External obsolescence is a loss in value caused by influences outside the property. The principle of externalities describes how uses and conditions outside the property, beyond the owner's control, affect its value, which makes it the closest match.
Background Knowledge
Externalities are effects on a property's value from uses or conditions outside the property, and they can be positive or negative. In the cost approach, a negative external influence that causes a loss in value is measured as external obsolescence. Because the cause lies outside the property, it is generally not curable by the owner.
Real-World Application
An appraiser using the cost approach on a home near a newly expanded highway finds market evidence that nearby homes sell for less than similar homes farther away. He attributes that loss to an external influence. He measures it as external obsolescence and explains the connection to the principle of externalities in his report.
More Market Questions
In market area analysis, what characteristic distinguishes a district from a neighborhood?
Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
How does the Fannie Mae Selling Guide define a neighborhood?
Several homes in a neighborhood are vacant and boarded up. Which market force does Fannie Mae classify this as?
Infrastructure investment such as a new interchange typically affects nearby land by:
A city raises property tax rates and tightens building regulations. Which market force does Fannie Mae classify these as?
An appraiser believes, without market evidence, that a nearby group home lowers values. What does Fannie Mae require?
Which three categories are used to report the supply of properties in a Fannie Mae neighborhood section?
An appraiser is asked for a retrospective value opinion as of three years ago. When must the appraiser meet the Competency Rule?
Can mixed land uses in a residential neighborhood ever enhance home values, according to Fannie Mae?
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
Census figures for contractor-built houses are compared with sales of new speculative homes in the same area. Why are they not directly comparable?
Next Question
Under Fannie Mae's Selling Guide, an appraiser supports a time adjustment with a home price index (HPI) for the subject's market. The index was 212.0 in the comparable's contract month and 222.6 in the effective-date month. The comparable sold for $380,000. What time-adjusted price does the index indicate?