A layout deficiency costs $80,000 to correct and the supported value increase is $30,000. No broader required repairs or benefits apply. How is the deficiency classified?
Correct Answer
D) Economically incurable functional obsolescence.
Economic curability depends on the stated cost and value benefit rather than the component’s name. Here $80,000 cost exceeds $30,000 value added, so correction is uneconomic. Layouts, wiring and deferred repairs are not universally curable or incurable without those facts.
Why This Is the Correct Answer
Option D is correct because a layout deficiency is functional, and functional obsolescence is curable only when the cost to cure does not exceed the resulting value increase. Spending $80,000 to gain $30,000 is not economically justified, so the deficiency is incurable functional obsolescence.
Why the Other Options Are Wrong
Option A: Curable, because walls can physically be moved.
Option A, curable because walls can physically be moved, is wrong because curability depends on economics, not physical possibility. Moving walls here would cost $80,000 to add only $30,000.
Option B: Curable, because design deficiencies must be corrected.
Option B, curable because design deficiencies must be corrected, is wrong because there is no requirement to correct a design deficiency. The cost-versus-benefit test controls, and here cost exceeds benefit.
Option C: Physical deterioration, because the cure costs money.
Option C, physical deterioration because the cure costs money, is wrong because a layout problem is a design issue, which is functional. Having a cost to cure does not make a deficiency physical.
Cure if it pays
If the value added is at least the cost to cure, it is curable. If cost is higher, it is incurable.
How to use: Use this comparison of cost and value added on each curable-versus-incurable question.
Exam Tip
Compare the two dollar figures first. Reasons based on physical possibility or a duty to fix are not the economic test.
Common Mistakes to Avoid
- -Calling a deficiency curable because it is physically fixable
- -Classifying a design problem as physical deterioration
- -Ignoring the comparison of cost to cure and value added
Concept Deep Dive
Analysis
This question tests the economic test for curability of functional obsolescence. A deficiency is curable when the cost to correct it is less than or equal to the value it adds. Here $80,000 to cure exceeds the $30,000 value increase, so it is economically incurable.
Background Knowledge
Both physical deterioration and functional obsolescence are classified as curable or incurable. An item is curable when the cost to cure is less than or equal to the anticipated increase in value; otherwise it is incurable. The classification depends on the stated cost and benefit, not on the type of component.
Real-World Application
A home has a bedroom that can be reached only through another bedroom. A contractor quotes $80,000 to reconfigure it, but sales show the fix would add only $30,000, so the appraiser treats it as incurable functional obsolescence.
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?
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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?
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