External Obsolescence
~10 min read · Measure loss from outside the property line and allocate it between land and building.
External obsolescence is value lost to forces OUTSIDE the property line — the rendering plant, the rate spike, the market glut — and it is always incurable: you cannot renovate the neighborhood. The exam tests recognition, the two flavors (locational and economic), and the land/building allocation.
What it is
External (economic) obsolescence: loss from negative influences beyond the site — locational (proximity to the highway, the landfill, incompatible uses) or economic/market-wide (oversupply, high interest rates, employer collapse, industry decline). Because the owner controls none of it, it is incurable by definition — though not necessarily permanent (a demolished nuisance or recovered market ends it).
- Outside-the-boundary causes: locational or market-wide
- Always incurable — no owner action removes it
- Can be temporary (markets recover; nuisances close)
Measuring it
Two standard techniques. Paired sales: identical homes beside and away from the influence — the price gap measures the obsolescence (the backing-to-freeway discount). Capitalization of income loss: rent beside the nuisance runs $200/month under the norm — capitalize the loss (by GRM or cap rate) into value. Allocation refinement: the measured loss belongs partly to LAND and partly to IMPROVEMENTS — and since the cost approach values land by market comparison (which already reflects the location), only the improvement share deducts as depreciation, allocated by the land-to-building ratio.
- Paired sales gap or capitalized rent loss
- Allocate loss between land and building
- Deduct only the building's share — land value already ate its part
Telling the three apart
Classification discipline: worn roof = physical; bad floor plan = functional; airport noise = external. The cause's ADDRESS decides — inside the structure's fabric (physical), inside the design (functional), outside the boundary (external). Exam questions describe a value loss and ask its species; mislabeling changes both curability and the arithmetic.
Worked example
A regional mall closure craters a submarket. Paired sales show homes there selling $40,000 under identical homes in unaffected areas. For a subject with a land-to-total-value ratio of 25%, the cost approach is underway (land valued by local comps at its current depressed level). How much external obsolescence deducts from the improvements?
Species check: the cause — an employment/retail collapse — sits outside every property line: external, economic flavor, incurable. Measurement: the paired-sales gap says $40,000 of total-property loss. Allocation: land is 25% of value, and the land comps ALREADY trade at depressed levels — the land's $10,000 share of the loss is baked into the separately estimated land value; deducting it again from improvements would double-count. External obsolescence charged to the building: 75% × 40,000 = $30,000. If instead the analyst capitalized rent loss ($250/month × GRM 130 = $32,500 total), the same allocation logic follows. Address of the cause, size of the gap, share to the building — the full procedure.
Common exam pitfalls
Calling any big value loss 'external.'
Classify by the cause's location: fabric, design, or beyond the boundary — only the last is external.
Deducting the whole loss from improvements.
Land comps already price the bad location — allocate and deduct only the building's share.
Attempting a 'cure' analysis.
External obsolescence has no curable branch — the owner cannot fix the freeway.
If the problem lives outside the fence, you can't fix it — measure the gap, give land its share, charge the building the rest.
Recap
- External = outside forces: locational or economic
- Always incurable; possibly temporary
- Measure by paired sales or capitalized income loss
- Allocate between land and improvements
- Deduct only the improvement share in the cost approach
- Classify losses by the cause's address
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