What type of depreciation occurs when a property becomes less desirable due to changes in the surrounding neighborhood?

Q: What is the correct answer to: What type of depreciation occurs when a property becomes less desirable due to changes in the surrounding neighborhood?

The correct answer is External obsolescence. External obsolescence is the correct term for depreciation caused by factors outside the property boundaries that make it less desirable. When neighborhood changes occur—such as increased crime, declining schools, new industrial development, or deteriorating infrastructure—these external factors reduce property value regardless of the property's physical condition. This type of depreciation is beyond the owner's control and originates from the surrounding environment rather than the property itself.

Q: What background knowledge is needed for this Property Valuation question?

Property depreciation in valuation consists of three main types: physical deterioration (wear and tear to the structure), functional obsolescence (outdated design or features), and external obsolescence (negative external factors). External obsolescence, also called economic obsolescence, results from factors beyond the property owner's control, such as neighborhood decline, zoning changes, environmental issues, or infrastructure problems. This concept is essential in the cost approach to valuation, where appraisers subtract all forms of depreciation from replacement cost new. Understanding depreciation types helps real estate professionals advise clients on property values, investment potential, and market conditions.

Q: What is a good way to remember the answer to this Property Valuation question?

Remember 'EXTERNAL = EXTERNAL factors' - External obsolescence comes from factors OUTSIDE the property boundaries, like neighborhood changes. Think 'EX-ternal = EX-ternal environment affecting value.' When you see depreciation questions, visualize the PFE house. Ask yourself: Is the problem with the building itself (Physical), the building's design/function (Functional), or something outside the property boundaries (External)? Neighborhood changes always point to External obsolescence.

Q: What exam tip applies to this Property Valuation question?

Focus on the source of depreciation: internal property issues = functional, physical wear = physical, outside factors = external obsolescence.

Q: How does this Property Valuation concept apply in real world practice?

A well-maintained heritage home in downtown Toronto experiences declining property values when a new industrial facility opens nearby, creating noise and air quality issues. Despite the home's excellent physical condition and desirable historical features, potential buyers are deterred by the environmental concerns. The property owner cannot remedy this situation through renovations or improvements, as the problem originates from external factors beyond their control. This scenario demonstrates external obsolescence affecting property marketability and requiring disclosure to potential buyers.

Question

Property ValuationDepreciation TypesMEDIUM

What type of depreciation occurs when a property becomes less desirable due to changes in the surrounding neighborhood?

Answer Options

A

Physical depreciation

B

Functional obsolescence

C

External obsolescence

D

Economic depreciation