Florida Real Estate Broker ExaminationValuation and Market AnalysisHard
A real estate broker is conducting a market analysis for a client who owns a commercial building in an area that has recently experienced a significant increase in property taxes and insurance premiums due to new flood zone designations. These increased costs are reducing the property's net operating income without any physical changes to the property itself. This reduction in value is an example of:
- AFunctional Obsolescence
- BCurable Obsolescence
- CExternal Obsolescence
- DPhysical Deterioration
Show answer & explanationAnswer & explanation
Correct answer: C. External Obsolescence
External obsolescence (also known as economic obsolescence) is a loss in value due to factors outside the property boundaries, which are typically incurable by the property owner. Increased property taxes and insurance premiums due to external factors like flood zone designations directly impact the property's profitability and value without any physical change to the building.
Why the other options are wrong
- A. Functional obsolescence relates to outdated design or features within the property, not external cost increases.
- B. Curable obsolescence refers to a loss in value that can be economically fixed; external obsolescence is often incurable by the owner.
- D. Physical deterioration is wear and tear from use or age, not external economic factors.
External Obsolescence
A loss in value due to factors outside the property itself, such as economic conditions, neighborhood changes, or governmental regulations. It is typically incurable.
- Also known as economic obsolescence.
- Examples: proximity to undesirable land uses, traffic patterns, increased taxes, economic downturns.
- Property owner has no control over these factors.
Memory trick: Obsolescence: Why is this property losing its sparkle?