An appraiser's income approach produces a value well below the cost approach for a 15-year-old, well-maintained commercial building. Local rents have fallen since the area's largest employer closed. What most likely explains the gap?
Correct Answer
C) External obsolescence from the weakened local economy
Falling rents caused by the closure of a major employer are a loss in value from outside the property, which is external obsolescence. The income approach captures it through lower net operating income, while a cost approach that has not deducted it stays higher. Physical deterioration is unlikely in a well-maintained building, and a cap rate or land value set too low would push the values in the opposite direction.
Why This Is the Correct Answer
External obsolescence is correct because the facts point to a cause outside the property: the closure of the area's largest employer has reduced local rents. Lower rents mean lower net operating income, which lowers the income approach value, while a cost approach that has not deducted this loss stays higher. That is exactly the pattern described.
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Previous Question
A commercial property analysis shows three recent sales: $2.1M, $2.3M, and $1.9M for similar properties. However, the $1.9M sale was a distressed sale due to foreclosure. For valuation purposes, how should this data be treated?
Next Question
A commercial property appraiser is reconciling three different approaches that yielded the following values: Direct Comparison $2,100,000, Cost Approach $2,400,000, Income Approach $1,950,000. Given that this is an income-producing office building in a market with limited sales but strong rental data, which approach should receive the greatest weight in the final value estimate?