Which of the following is an example of functional obsolescence?
Correct Answer
B) A house with only one bathroom in a market where buyers expect two
Functional obsolescence occurs when a property's design, layout, or features are inadequate or inappropriate for current market expectations and standards.
Why This Is the Correct Answer
Option B represents functional obsolescence because having only one bathroom when the market expects two bathrooms creates a functional deficiency. This inadequacy in the property's layout fails to meet current buyer expectations and market standards. The house cannot function as effectively as competing properties with two bathrooms, making it less marketable and valuable. This is a classic example of functional obsolescence where the property's design is outdated relative to current market demands.
Why the Other Options Are Wrong
Option A: A roof that needs replacement due to age
A roof needing replacement due to age is physical deterioration, not functional obsolescence. The roof can still perform its basic function of protecting the structure, but it has deteriorated over time due to normal aging and weather exposure.
Option C: Decreased property values due to a nearby landfill
Decreased property values due to a nearby landfill represents external obsolescence (also called economic obsolescence). This is caused by factors outside the property boundaries that negatively impact value, not by the property's internal design or functional capabilities.
Option D: Normal wear on hardwood floors
Normal wear on hardwood floors is physical deterioration from regular use over time. The floors can still function as intended flooring, but show signs of aging and use rather than being functionally inadequate for current market expectations.
The FUN Test
FUNctional obsolescence = Features that are Unfashionable or iNadequate for today's market. If the property's features aren't 'FUN' (desirable) by current standards, it's functional obsolescence.
How to use: When you see answer choices, ask yourself: 'Is this about features being outdated/inadequate (FUN test), physical wear (deterioration), or outside problems (external)?' Apply the FUN test to identify functional obsolescence.
Exam Tip
Look for keywords like 'market expects,' 'current standards,' 'inadequate design,' or 'outdated layout' to identify functional obsolescence questions.
Common Mistakes to Avoid
- -Confusing physical deterioration with functional obsolescence
- -Mixing up external obsolescence with functional obsolescence
- -Thinking all old features automatically represent functional obsolescence rather than considering current market expectations
Concept Deep Dive
Analysis
Functional obsolescence is a form of depreciation that occurs when a property's design, layout, or features no longer meet current market standards or buyer expectations. Unlike physical deterioration, functional obsolescence relates to the property's ability to perform its intended function effectively in today's market. It can be either curable (economically feasible to fix) or incurable (too expensive to remedy relative to the value it would add). This type of obsolescence directly impacts a property's utility and marketability, making it less desirable compared to properties with more current features.
Background Knowledge
Appraisers must understand the three types of depreciation: physical deterioration (wear and tear), functional obsolescence (design inadequacies), and external obsolescence (outside negative influences). Functional obsolescence specifically relates to how well a property's features meet current market expectations and standards.
Real-World Application
When appraising a 1950s ranch home with one bathroom in a neighborhood where similar homes have been updated to include master suites, the appraiser must account for functional obsolescence in the cost approach and consider how this affects marketability in the sales comparison approach.
More Valuation Principles Questions
Market value is best defined as:
The principle of substitution states that:
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