Which of the following would be considered external obsolescence?
Correct Answer
A) A busy highway constructed next to the property
Why this is correct: External obsolescence is a form of depreciation caused by negative factors outside the subject property, such as noise, traffic, or undesirable neighboring uses. A new busy highway is an external factor diminishing value. Why the other choices are wrong: "Only one bathroom in a four-bedroom house" is functional obsolescence (internal design flaw). "A leaking roof" and "Worn carpeting" are physical deterioration (wear and tear). Exam tip: External obsolescence is the only form of depreciation typically not curable by the property owner.
Why This Is the Correct Answer
Why this is correct: External obsolescence is a form of depreciation caused by negative factors outside the subject property, such as noise, traffic, or undesirable neighboring uses. A new busy highway is an external factor diminishing value. Why the other choices are wrong: "Only one bathroom in a four-bedroom house" is functional obsolescence (internal design flaw). "A leaking roof" and "Worn carpeting" are physical deterioration (wear and tear). Exam tip: External obsolescence is the only form of depreciation typically not curable by the property owner.
Why the Other Options Are Wrong
The EXternal EXit Strategy
Remember 'EX-EX': EXternal obsolescence affects factors you must EXit the property to encounter. If you have to leave your property boundaries to see or experience the problem (highway, airport, landfill, etc.), it's external obsolescence.
How to use: When you see obsolescence questions, ask yourself: 'Do I need to EXit the property to encounter this problem?' If yes, it's EXternal obsolescence. If the problem exists inside the property boundaries, it's either physical deterioration or functional obsolescence.
Exam Tip
Look for location-based factors in the answer choices - anything involving traffic, noise, environmental hazards, or neighborhood changes typically indicates external obsolescence.
Common Mistakes to Avoid
- -Confusing functional obsolescence with external obsolescence when the issue involves property layout or design
- -Misidentifying physical deterioration as external obsolescence when the problem involves building components
- -Assuming all negative factors affecting property value are external obsolescence rather than distinguishing between the three types of depreciation
Concept Deep Dive
Analysis
External obsolescence, also known as economic obsolescence, refers to a loss in property value caused by factors outside the property boundaries that are beyond the property owner's control. This type of obsolescence is distinguished from physical deterioration (wear and tear of the property itself) and functional obsolescence (design deficiencies or outdated features within the property). External obsolescence is typically incurable because the property owner cannot fix or control the external factors causing the value loss. Understanding the three types of obsolescence is crucial for appraisers when analyzing depreciation and determining property values.
Background Knowledge
Appraisers must understand the three types of depreciation: physical deterioration (curable and incurable wear and tear), functional obsolescence (design deficiencies or outdated features), and external obsolescence (negative external influences). External obsolescence is always considered incurable because property owners cannot control or fix external factors like traffic, noise, or neighborhood changes.
Real-World Application
In practice, appraisers encounter external obsolescence when valuing properties near airports (noise), busy roads (traffic and noise), industrial facilities (odors or visual impact), or in declining neighborhoods. These factors require market analysis to quantify the value impact, often through paired sales analysis comparing similar properties with and without the external influence.
More Cost Approach Questions
A property generates $85,000 in Net Operating Income and sells for $1,062,500. What is the overall capitalization rate?
A property has potential gross income of $180,000, vacancy and collection loss of $15,000, and operating expenses of $65,000. What is the Net Operating Income?
A comparable sale occurred 8 months ago for $425,000. Market conditions indicate property values have increased 0.5% per month since that time. What is the adjusted sale price?
A property generates $150,000 in potential gross income. Market data indicates a 7% vacancy rate and operating expenses of 35% of effective gross income. If the cap rate is 9.5%, what is the indicated value?
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?
A building's gross rent multiplier (GRM) is 120. If the monthly rent is $2,500, what is the indicated value?
In the cost approach, economic obsolescence is characterized as:
The concept of regression in property values means that:
A commercial property has potential gross income of $120,000, vacancy and collection loss of 8%, and operating expenses of $35,000. Using a cap rate of 9.5%, what is the indicated value?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Related Tools
Previous Question
An appraiser finds that homes with swimming pools sell for $15,000 more than comparable homes without pools. However, the cost to install a pool is $25,000. This illustrates the principle of:
Next Question
Three separate pairs indicate contributions of $12,000, $14,000 and $13,000 for a finished basement. What single adjustment is best supported?