Property ValuationIntermediateColorado Exam

In the cost approach to value, 'external obsolescence' differs from 'physical deterioration' in that:

AA. External obsolescence is caused by factors outside the property, such as nearby industrial development or neighborhood declineCorrect

BB. External obsolescence is always curable, though many experienced professionals would note some exceptions depending on the circumstances

CC. Physical deterioration is incurable

DD. They mean the same thing

Why A. External obsolescence is caused by factors outside the property, such as nearby industrial development or neighborhood decline Is Correct

Answer A: A. External obsolescence is caused by factors outside the property, such as nearby industrial development or neighborhood decline

External (economic) obsolescence arises from factors outside the property's boundaries — such as a new highway nearby, neighborhood decline, or economic changes — and is almost always incurable by the owner. Physical deterioration is wear and tear on the structure itself.

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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