Which of the following is an example of external obsolescence?
Correct Answer
A) A residential property located next to a newly constructed industrial plant
Why this is correct: External obsolescence (economic obsolescence) is depreciation caused by factors external to the property, such as negative influences from the neighborhood or environment. A new industrial plant next to a residential property creates noise, traffic, or pollution, reducing desirability and value—an external factor the owner cannot control. Why the other choices are wrong: "A leaky roof" is curable physical deterioration. "Outdated kitchen appliances" is curable functional obsolescence. "A one-car garage in a neighborhood where two-car garages are standard" is functional obsolescence (deficiency compared to market norms) but is within the property boundaries. Exam tip: External obsolescence comes from outside the lot lines and is usually incurable.
Why This Is the Correct Answer
Why this is correct: External obsolescence (economic obsolescence) is depreciation caused by factors external to the property, such as negative influences from the neighborhood or environment. A new industrial plant next to a residential property creates noise, traffic, or pollution, reducing desirability and value—an external factor the owner cannot control. Why the other choices are wrong: "A leaky roof" is curable physical deterioration. "Outdated kitchen appliances" is curable functional obsolescence. "A one-car garage in a neighborhood where two-car garages are standard" is functional obsolescence (deficiency compared to market norms) but is within the property boundaries. Exam tip: External obsolescence comes from outside the lot lines and is usually incurable.
Why the Other Options Are Wrong
The EX-ternal Boundary Rule
Remember 'EX-ternal = EX-ternal to property boundaries.' External obsolescence always comes from OUTSIDE the property lines and is EXTERNAL to the owner's control. Think 'EX-ternal = EX-cluded from owner control.'
How to use: When you see obsolescence questions, immediately ask: 'Is this problem coming from outside the property boundaries?' If yes, it's external obsolescence. If it's on the property itself, determine if it's physical damage or functional inadequacy.
Exam Tip
Look for keywords indicating location or proximity in external obsolescence questions: 'next to,' 'nearby,' 'adjacent to,' 'in the area,' or 'neighborhood.' These signal factors outside the property boundaries.
Common Mistakes to Avoid
- -Confusing functional obsolescence with external obsolescence when the issue involves neighborhood standards
- -Thinking that external obsolescence can be cured by the property owner
- -Failing to recognize that external obsolescence affects the entire neighborhood, not just one property
Concept Deep Dive
Analysis
This question tests understanding of the three types of depreciation in real estate appraisal: physical deterioration, functional obsolescence, and external obsolescence. External obsolescence, also called economic obsolescence, is the only type of depreciation that originates from factors completely outside the property boundaries and beyond the owner's control. It's caused by negative influences in the surrounding area that diminish the property's value, such as environmental hazards, zoning changes, or incompatible land uses. Understanding this concept is crucial for appraisers to properly identify and measure all forms of value loss in the cost approach.
Background Knowledge
Appraisers must understand the three types of depreciation to properly apply the cost approach to value. Physical deterioration involves actual wear and damage to the structure, functional obsolescence involves design deficiencies or outdated features within the property, and external obsolescence involves negative influences from outside the property boundaries.
Real-World Application
In practice, appraisers encounter external obsolescence when valuing homes near airports (noise), industrial facilities (pollution/aesthetics), busy highways (traffic/noise), or in declining neighborhoods. This depreciation is often the most difficult to quantify and typically requires paired sales analysis or market extraction techniques to measure accurately.
More Cost Approach Questions
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A property sold for $320,000 one year ago. If market conditions have improved by 6% since that sale, what is the time-adjusted sale price for comparison purposes?
A commercial building cost $2,500,000 to construct. The land value is $600,000. If the building has suffered 15% physical deterioration and 8% functional obsolescence, what is the depreciated cost of the improvements?
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In the cost approach, economic obsolescence is characterized as:
The concept of regression in property values means that:
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A comparable sold for $300,000 and carries adjustments of +$12,000, -$5,000, +$3,000 and -$2,000. What is the net adjustment as a percentage of the sale price?
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