Which of the following best describes functional obsolescence?
Correct Answer
A) Inadequacy or over-adequacy against market standards
Functional obsolescence is a value loss from utility deficiencies or superadequacies relative to market standards. Physical wear and deferred repairs are physical causes, and adverse external influences are a different category. The mere presence of an older feature does not prove a measurable loss.
Why This Is the Correct Answer
Option A is correct because functional obsolescence is a loss in utility and value from reduced desirability of an improvement, measured by market standards. That loss can come from inadequacy, such as too few bathrooms, or over-adequacy, such as a component in excess of market standards with no economic advantage to cure.
Why the Other Options Are Wrong
Option B: Loss in value from factors outside the property itself
Option B, loss in value from factors outside the property itself, describes external obsolescence. Functional obsolescence comes from the improvement's own design or features.
Option C: Items of deferred maintenance on the building fabric
Option C, items of deferred maintenance on the building fabric, describes physical deterioration. Those are repair items, not a mismatch with market standards for utility.
Option D: Wear and tear arising from ordinary normal use
Option D, wear and tear arising from ordinary normal use, is physical deterioration. Functional obsolescence concerns design and utility, not wear.
Functional means fit to market
Functional obsolescence asks whether the design fits what buyers want: too little or too much. Wear is physical; outside causes are external.
How to use: Use fit to market to identify functional obsolescence among depreciation choices.
Exam Tip
Remember that functional obsolescence can come from too much as well as too little. A superadequate feature can still be a functional problem.
Common Mistakes to Avoid
- -Thinking functional obsolescence covers only deficiencies
- -Labeling deferred maintenance as functional obsolescence
- -Assuming any older feature proves a value loss
Concept Deep Dive
Analysis
This question tests the definition of functional obsolescence and how it differs from the other types of depreciation. Functional obsolescence is a loss in utility measured against market standards, which can come from a deficiency or from a superadequacy. External factors and physical wear belong to other categories.
Background Knowledge
Accrued depreciation includes physical deterioration, functional obsolescence and external obsolescence. Functional obsolescence reflects a property's utility compared with what the market expects at the valuation date. It includes both deficiencies and superadequacies, and an older feature does not by itself prove a measurable loss.
Real-World Application
A home in a modest neighborhood has a large commercial-grade kitchen that cost far more than buyers will pay for. The appraiser treats the excess cost as a superadequacy, a form of functional obsolescence, supported by sales of homes with standard kitchens.
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:
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The principle of progression indicates that:
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An appraiser estimates the current cost new of the improvements at $2,500,000. Depreciation is measured as a 15% deduction from cost new, followed by a further deduction of 8% of the remaining amount. No other loss applies, and land is not included. What is the depreciated cost of the improvements?