Property ValuationIntermediateCalifornia Exam

What is 'economic obsolescence' in property appraisal?

APhysical wear and tear from normal use, under standard appraisal methodology

BLoss of value from within the property (poor floor plan, outdated systems), as typically applied in a comparative market analysis

CLoss of value caused by external factors beyond the property boundaries, such as a nearby industrial plant or economic declineCorrect

DDepreciation caused by outdated construction methods, consistent with USPAP appraisal standards

Why Loss of value caused by external factors beyond the property boundaries, such as a nearby industrial plant or economic decline Is Correct

Answer C: Loss of value caused by external factors beyond the property boundaries, such as a nearby industrial plant or economic decline

Economic (external) obsolescence is a loss in property value caused by factors external to the property, such as nearby industrial uses, declining neighborhood conditions, airport noise, or changes in the local economy. It is generally the most difficult form of depreciation to cure.

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.

Key Property Valuation Terms in This Question

Appraisal

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

Depreciation

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

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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.

Net Operating Income (NOI)

The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.

Capitalization Rate (Cap Rate)

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

Math Concepts

Net Operating Income Depreciation Profit & Loss

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Property Valuation Guide

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