Florida Real Estate Broker ExaminationValuation and Market AnalysisMedium
A real estate appraiser is evaluating a 25-year-old commercial building using the cost approach. The appraiser estimates the replacement cost new of the building at $1,500,000. However, the building has an outdated HVAC system, inefficient lighting, and a floorplan that no longer meets modern business needs. Which type of depreciation primarily accounts for these factors?
- AExternal Obsolescence
- BEconomic Obsolescence
- CPhysical Deterioration
- DFunctional Obsolescence
Show answer & explanationAnswer & explanation
Correct answer: D. Functional Obsolescence
Functional obsolescence refers to a loss in value due to inefficiencies or inadequacies of the property itself, such as an outdated design, floorplan, or systems (HVAC, lighting) that are no longer desirable or efficient by modern standards.
Why the other options are wrong
- A. External obsolescence is a loss in value from factors outside the property (e.g., a noisy highway, economic downturn).
- B. Economic obsolescence is another term for external obsolescence, caused by economic or environmental factors outside the property.
- C. Physical deterioration is wear and tear from age or neglect (e.g., a leaky roof, cracked foundation).
Functional Obsolescence
A loss in value due to a design or feature deficit within the property itself, making it less desirable or efficient by current standards.
- Can be curable (e.g., updating a kitchen) or incurable (e.g., poor floor plan).
- Caused by outdated features, poor design, or inadequate systems.
- Distinguished from physical wear and tear or external factors.
Memory trick: P-F-E: Physical, Functional, External - Know Your Losses!