Florida Real Estate Sales Associate Examination Content OutlineReal Estate Valuation and Market AnalysisMedium
A property owner is considering selling a commercial building. An appraiser determines that the building's current HVAC system is outdated and inefficient compared to modern standards, leading to higher operating costs for tenants. This situation is an example of which type of depreciation?
- APhysical deterioration
- BEconomic life depreciation
- CFunctional obsolescence
- DExternal obsolescence
Show answer & explanationAnswer & explanation
Correct answer: C. Functional obsolescence
Functional obsolescence refers to a loss in value due to a property's design, features, or utility no longer meeting modern standards or market expectations. An outdated and inefficient HVAC system falls into this category because it impacts the property's functionality and desirability.
Why the other options are wrong
- A. Physical deterioration is wear and tear, not a design flaw.
- B. Economic life depreciation is a general concept, not a specific type of obsolescence.
- D. External obsolescence comes from outside the property, like a nearby landfill.
Functional Obsolescence
A loss in value due to a property's design, features, or utility no longer being desirable or efficient by current standards.
- Caused by factors within the property boundaries.
- Can be curable (e.g., updating a kitchen) or incurable (e.g., poor floor plan).
- Examples include outdated fixtures, inefficient layouts, or insufficient amenities.
Memory trick: Obsolescence: Is it inside (functional), or is it outside (external)?