Florida Real Estate Broker ExaminationValuation and Market AnalysisHard
A real estate broker is performing a valuation for a client who owns a 15-year-old single-family home. The home has a single, small bathroom, which is significantly out of step with current market expectations for homes of its size and price point in the neighborhood, where two or more bathrooms are standard. The cost to add a second bathroom is estimated at $20,000, and market analysis suggests this improvement would add $30,000 to the property's value. This is an example of which type of depreciation?
- APhysical deterioration
- BExternal obsolescence
- CCurable functional obsolescence
- DIncurable functional obsolescence
Show answer & explanationAnswer & explanation
Correct answer: C. Curable functional obsolescence
Functional obsolescence refers to a loss in value due to design or utility issues within the property. It is 'curable' if the cost to correct the deficiency is less than or equal to the value added by the correction. In this case, adding a bathroom costs $20,000 but adds $30,000 in value, making it curable functional obsolescence.
Why the other options are wrong
- A. Physical deterioration relates to wear and tear, not design inadequacy.
- B. External obsolescence is caused by factors outside the property.
- D. It is not incurable because the cost to cure ($20,000) is less than the value added ($30,000).
Curable Functional Obsolescence
A loss in property value due to an outdated design, poor layout, or inadequate features that can be economically corrected, meaning the cost to cure is less than or equal to the value added by the correction.
- Results from issues within the property itself.
- Determined by comparing the cost to cure versus the value gained.
- Examples include adding a bathroom, updating an inefficient kitchen, or reconfiguring a poor floor plan.
Memory trick: Curable: Can fix it for a gain.