An affected-site estimate already reflects part of a whole-property external loss. Why analyze the allocation before deducting improvement depreciation?
Correct Answer
A) To avoid counting the site’s already-reflected loss again.
A land estimate from similarly affected sites may already incorporate some external loss. Deducting the whole-property penalty again only from improvements can double count. Identify where each supported loss is reflected; no fixed allocation ratio or universal lender reporting rule follows.
Why This Is the Correct Answer
Option A is correct because a properly estimated site value already reflects the portion of external loss attributable to the site. If the whole-property loss were deducted again from the improvements, part of it would be counted twice, so the loss must be allocated.
Why the Other Options Are Wrong
Option B: Because land physically wears out faster than buildings.
Option B, because land physically wears out faster than buildings, is wrong because land generally does not wear out, and the issue is double counting of external loss, not physical wear.
Option C: Because lenders require a fixed allocation ratio for it.
Option C, because lenders require a fixed allocation ratio, is wrong because there is no fixed allocation ratio. The allocation depends on where the supported loss is reflected for the property at hand.
Option D: To eliminate the need to measure market reaction.
Option D, to eliminate the need to measure market reaction, is wrong because allocation does not replace market analysis. The loss and its split still need market support.
Count each loss once
If the land price already took its hit, only the building's share remains to deduct.
How to use: Use this check whenever a whole-property external loss appears alongside a site value in a cost approach.
Exam Tip
When a question mentions a site value that already reflects a loss, look for the answer about avoiding double counting.
Common Mistakes to Avoid
- -Deducting the whole external loss from improvements when site value already reflects part of it
- -Assuming a fixed land-to-building allocation ratio
- -Thinking allocation replaces market evidence
Concept Deep Dive
Analysis
This question tests avoiding double counting of external obsolescence. When a site value already reflects part of a whole-property external loss, only the remaining portion should be charged to the improvements. Analyzing the allocation prevents deducting the same loss twice.
Background Knowledge
External obsolescence often affects the entire property, both land and improvements. A site value derived from similarly affected land sales already includes the site's share of the loss. Only the portion attributable to the improvements should be deducted as depreciation in the cost approach.
Real-World Application
Homes near a new airport flight path lose value, and nearby lot sales also reflect the noise. The appraiser deducts from the improvements only the share of the loss not already captured in the site value.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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