Example of economic obsolescence in real estate?
Audio Lesson
Duration: 2:31
Question & Answer
Review the question and all answer choices
Old kitchen cabinets
Old kitchen cabinets represent physical deterioration, a type of depreciation that can be repaired or replaced. This is not economic obsolescence as it's an internal property issue rather than an external economic factor.
Pool built at mother's house
A pool built at a mother's house represents functional obsolescence - a mismatch between property features and market preferences. This is not economic obsolescence as it relates to the property's utility rather than external economic conditions.
Noisy highway next to home
Sellers unable to afford property
Sellers' financial inability to afford a property reflects their personal circumstances, not a factor affecting the property's market value or obsolescence. This is irrelevant to property valuation concepts.
Deep Analysis
AI-powered in-depth explanation of this concept
Understanding economic obsolescence is crucial for real estate professionals because it directly impacts property valuation and appraisal. Economic obsolescence represents a permanent reduction in property value caused by external factors beyond the property's physical boundaries. This question tests your ability to distinguish between different types of depreciation in property valuation. Option C correctly identifies economic obsolescence because a noisy highway is an external factor affecting the property's value. The other options represent different types of depreciation: A is physical deterioration (old cabinets), B is functional obsolescence (pool not matching market preferences), and D reflects financial circumstances rather than property value factors. Understanding these distinctions is essential for accurate appraisals, proper disclosures, and advising clients on property investments.
Knowledge Background
Essential context and foundational knowledge
Economic obsolescence is one of three types of property depreciation used in valuation, alongside physical deterioration and functional obsolescence. It occurs when external economic factors permanently reduce a property's value. Unlike other forms of depreciation, economic obsolescence cannot be remedied by property improvements. Examples include zoning changes, new construction projects, or economic shifts that impact a property's desirability. Appraisers must identify and quantify economic obsolescence when determining a property's fair market value, as it represents a permanent impairment of worth.
Think of economic obsolescence like living next to a garbage dump - it's not something wrong with your house itself, but the location's external environment that permanently reduces your property's value.
When evaluating options, ask: 'Is this about the property itself or something external affecting it?'
For obsolescence questions: External factors = economic; Property features = functional; Wear and tear = physical. Always check if the issue originates from outside the property boundaries.
Real World Application
How this concept applies in actual real estate practice
A real estate agent is listing a home near a newly expanded highway. Despite the house being in excellent condition, comparable properties are selling for 15% less than similar homes in quieter areas. The agent must understand this is economic obsolescence - an external factor permanently affecting value. When advising the seller, the agent should acknowledge this market reality rather than suggesting cosmetic fixes, as the value reduction is due to the highway noise, not the property's condition.
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