Property ValuationIntermediateAlabama Exam

Economic (external) obsolescence is caused by:

APoor floor plan design, a position that many in the industry would generally find reasonable

BDeferred maintenance

CFactors outside the property, such as neighborhood decline or nearby highway constructionCorrect

DOutdated HVAC systems

Why Factors outside the property, such as neighborhood decline or nearby highway construction Is Correct

Answer C: Factors outside the property, such as neighborhood decline or nearby highway construction

Economic (external) obsolescence results from factors outside the property itself — such as declining neighborhood conditions, proximity to undesirable uses, or economic downturns. It is generally incurable.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

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Key Terms to Know

Depreciation

A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

Capitalization Rate (Cap Rate)

A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.

Gross Rent Multiplier (GRM)

A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.

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