A newly constructed home is located in a neighborhood where most of the surrounding homes are 30-40 years old and feature outdated architectural styles and smaller floor plans. The new home's value may be negatively impacted by the older homes around it. This situation is an example of which type of depreciation?
- APhysical deterioration - curable
- BExternal obsolescence
- CFunctional obsolescence
- DPhysical deterioration - incurable
Show answer & explanationAnswer & explanation
Correct answer: B. External obsolescence
External obsolescence (also known as economic obsolescence) is a loss in value due to factors outside the property itself, which are generally beyond the property owner's control. The negative impact of an older, less desirable neighborhood on a newer, superior home perfectly illustrates this, as the surrounding properties are external factors. This is distinct from functional obsolescence, which relates to the property's internal design or features.
Why the other options are wrong
- A. Curable physical deterioration refers to fixable wear and tear on the property itself (e.g., a leaky roof).
- C. Functional obsolescence is a loss in value due to outdated or poor design *within* the property (e.g., a single bathroom in a five-bedroom home), not external factors.
- D. Incurable physical deterioration refers to wear and tear that is not economically feasible to fix (e.g., structural aging of the entire building).
External Obsolescence
External obsolescence (also called economic obsolescence) is a form of depreciation in the cost approach that reflects a loss in value due to factors outside the property's boundaries, over which the property owner has no control. It is generally considered incurable.
- Caused by neighborhood decline, increased traffic, environmental hazards, changes in zoning, or proximity to undesirable land uses.
- Always incurable from the property owner's perspective.
- Affects the overall market desirability and value of the property.
Memory trick: Physical, functional, external: each loss in value, a different journal.