An appraiser determines that a residential property suffers from 'curable physical deterioration' due to a worn-out roof that needs replacement. In the cost approach, how would the appraiser typically account for this type of depreciation?
- ABy deducting the full cost of a new roof from the property's estimated value.
- BBy including the cost of a new roof in the reproduction cost new, then adjusting for age.
- CBy estimating the loss in value due to the roof's condition and subtracting it.
- DBy ignoring it, as physical deterioration is only considered incurable.
Show answer & explanationAnswer & explanation
Correct answer: C. By estimating the loss in value due to the roof's condition and subtracting it.
Curable physical deterioration refers to items of wear and tear that are economically feasible to repair or replace. In the cost approach, the cost to cure (i.e., the cost to replace the roof) is estimated, and this amount is directly deducted from the reproduction or replacement cost new of the property. This reflects the loss in value attributable to the current condition of the roof.
Why the other options are wrong
- A. While the cost of a new roof is relevant, the depreciation is the 'loss in value' due to the existing worn roof, not necessarily the full cost of a brand new one as an immediate deduction from 'estimated value' without context of 'cost new'. The direct deduction is from the cost new, representing the loss in value.
- B. The cost approach starts with the cost to reproduce/replace new, then *deducts* depreciation. Including the cost of a new roof in the 'cost new' doesn't make sense if the goal is to account for the *depreciation* of the existing worn roof.
- D. Both curable and incurable physical deterioration are considered in the cost approach.
Curable Physical Deterioration
Curable physical deterioration is a form of depreciation in the cost approach that refers to items of wear and tear on a property that are economically feasible to repair or replace. The cost to cure these items is less than the value they add to the property.
- Examples include worn-out roofs, painting, minor repairs.
- Accounted for by estimating the cost to cure (repair or replace) and deducting it from the reproduction/replacement cost new.
- Distinguished from incurable physical deterioration, which is not economically feasible to fix.
Memory trick: Curable's fixable, its cost is subtracted, restoring its worth, fully enacted.