Chapter 6

Question 1

Three kinds of depreciation:

Answer 1

Physical deterioration
Functional obsolescence
External obsolescence

Question 2

The wear and tear that begins when a building is completed and placed into service.

Answer 2

Physical depreciation

Question 3

The impairment of functional capacity of improvements according to market tastes and standards.

Answer 3

Functional Obsolescence

Question 4

This could be evident in an older kitchen or bath that no longer meets market expectations or tastes.

Answer 4

functional obsolescence

Question 5

This means that the building improvements do not “function” as well as they should.

Answer 5

functional obsolescence

Question 6

The most common causes of functional obsolescence are

Answer 6

layout problems, outmoded items, inadequacies, superadequacies, and atypical or unusual items.

Question 7

For example, the heating system is not large enough or the insulation is inadequate. This would be an

Answer 7

inadequacy

Question 8

These are things that are more than adequate for their intended purpose. Someone paid more for something than was necessary. They will not be able to recoup the additional expense in the marketplace.

Answer 8

Superinadequacies

Question 9

Functional obsolescence may also be caused by any item that strays far enough from the norm. An item may be, in the abstract, relatively typical and normal on its own. However, when placed in another setting it may become

Answer 9

atypical or unusual enough to cause loss in value

Question 10

A type of depreciation; a diminution in value caused by negative external influences and generally incurable on the part of the owner, landlord, or tenant. The external influence may be either temporary or permanent. Occurs off the site.

Answer 10

External obsolescence

Question 11

The difference between the cost of an improvement and its market value on the effective date of the appraisal is

depreciation
obsolescence
effective age
opportunity cost

Answer 11

depreciation

Question 12

A 10-­year-­old house will always have

physical deterioration
functional obsolescence
external obsolescence
all of these

Answer 12

physical deterioration

Question 13

True or False: External obsolescence can be shared between building and land.

Answer 13

True

Question 14

In most situations, which of these would be considered an example of a superadequacy?

gold-plated faucets
R-90 insulation in walls and ceilings
foundation walls that are 4 feet thick
all of these

Answer 14

all of these

Question 15

True or False: Functional obsolescence may be present in a brand-new structure.

Answer 15

True

Question 16

Physical deterioration is best described as

factors outside a property that diminish its value
always incurable
outmoded items
wear and tear

Answer 16

wear and tear

Question 17

Which of these is NOT a cause of functional obsolescence?

layout problems
inadequacies
superadequacies
deferred maintenance

Answer 17

deferred maintenance

Question 18

The period over which improvements to real estate contribute to property value.

Answer 18

Economic Life

Question 19

The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed.

Answer 19

Useful Life

Question 20

An estimate of how old a building or improvement will be when it is worn out.

Answer 20

Physical Life

Question 21

The total period a building lasts or is expected to last as opposed to its economic life.

Answer 21

Physical Life

Question 22

Land ______ lose value simply because it is older, whereas buildings _____ lose value as they age.

Answer 22

won’t; will

Question 23

Most buildings have an __________ life that is shorter than their ________ life.

Answer 23

economic; physical

Question 24

The number of years that have elapsed since construction of an improvement was completed; also called historical or chronological age

Answer 24

Actual age

Question 25

The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age

Answer 25

Effective Age

Question 26

The three main methods of estimating depreciation are:

Answer 26

Age-life method
Modified age-life
Breakdown method or observed condition

Question 27

These two are the primary methods used by real property appraisers. These methods tend to deal with the whole property and are easier to understand. However, the limitations are that they calculate lump-sum depreciation from all causes and do not distinguish between long-lived and short-lived items.

Answer 27

Age-life method and modified age-life

Question 28

This method is further limited in that it assumes a straight line pattern of depreciation. This may not be realistic as depreciation tends to occur less rapidly in the earlier years of a building’s life and then accelerates towards the end.

Answer 28

Age-life

Question 29

This method is more detailed and identifies and treats each item of depreciation separately. It is more accurate, but is more time-consuming and requires more research, analysis, and data. Therefore, this method is not generally employed by residential appraisers.

Answer 29

Breakdown method/observed condition

Question 30

The estimated period over which existing improvements are expected to contribute economically to a property; an estimate of the number of years remaining in the economic life of a structure or structural components as of the effective date of the appraisal; used in the economic age-life method of estimating depreciation.q

Answer 30

Remaining Economic Life

Question 31

f a total economic life is estimated to be 60 years and the current effective age is estimated to be 20 years, then by simple subtraction the remaining economic life is

Answer 31

40 years

Question 32

Fannie Mae and Freddie Mac no longer require the appraiser to estimate remaining _________ _____, but FHA and VA still do. Other clients might desire to have that information supplied as well.

Answer 32

economic life

Question 33

In this method, total depreciation is estimated by calculating the ratio of the effective age of a property to its economic life. This gives a percentage of the life that has been used up. It is perhaps less accurate than other methods, because of the judgments involved, but is easy to apply.

Answer 33

Age-life

Question 34

Age life method formula

Answer 34

(effective age/ total economic life) x total cost = depreciation

(15/60) x $220,000 = $55,000 depreciation

Question 35

The cost new of the improvements is $245,200, the site value is $60,000, and the effective age is 17. The total economic life expectancy judged by comparable sales is 55 years. What is the indicated value bu the cost approach?

Answer 35

17/55= .309 (or 30.9%)
$245,200 x .309 = $75,767

Total cost of improvements subtracted by the less total of depreciation.
$245,200 - 75,767 = $169,433 (depreciation cost)

Depreciation cost plus site value = indicated value by the cost approach

$169,433 + 60,000 = $229,433

The indicated value should be appropriately rounded. In this case, $230,000

Question 36

Many appraisers feel this is a preferable method when there are substantial items of deferred maintenance in a property. The cost of the deferred items is subtracted first. This would be more reflective of the way a typical purchaser would consider the property. They would modify the costs by fixing the deferred maintenance items right up front.

Answer 36

Modified Age-Life Method

Question 37

The cost new of the subject property is $235,000, the site value is $70,000 and the effective age is 25. The total economic life is estimated to be 60 years.

The subject has deferred maintenance items that total $4,500. After these repairs, the effective age will be reduced to 20 years.

Answer 37

$235,000 - $4,500 = $230,500 (Remaining Improvement Cost)

20 (effective age) / 60 (total economic life) = .333 (percent of depreciation)

Remaining improvement Cost minus Depreciation = Depreciated Cost Improvements

$230,500 - (230,500 x .33 = 76,065) = $154,435

Depreciated cost of improvements plus site value = value by cost approach then rounded

$154,435 + 70,000 = $224,435

Rounded to $225,000

Question 38

A building has an effective age of 25 and a total economic life of 80 years. What is its remaining economic life?

31
55
45
not enough information to determine

Answer 38

55

Question 39

A building has an effective age of 12 and a total economic life of 60 years. It cost $320,000 new and its site value is $95,000. What is the indicated value by cost approach?

Answer 39

$351,000

12 / 60 = 20% depreciation. $320,000 x 0.2 (or 20%) = $64,000.
$320,000 - $64,000 + $95,000 = $351,000

Question 40

A building has an effective age of 18 and a total economic life of 60 years. It cost $520,000 new and its site value is $125,000. What is the indicated percentage of age­-life depreciation?

Answer 40

18 / 60 =

30% depreciation.

Question 41

4 of 4
The number of years that have elapsed since a building was constructed is its

effective age
actual age
remaining economic life
economic age

Answer 41

actual age

Question 42

__________ will lose value over time just because of age.

Land
Buildings
Both land and buildings
Land, buildings, and chattel items

Answer 42

buildings

Question 43

This method is the most detailed and comprehensive way to measure depreciation. It breaks down depreciation into its component parts of physical deterioration, functional obsolescence and external obsolescence and measures each individually.

Answer 43

The breakdown method

Question 44

Items of physical deterioration or functional obsolescence that are economically feasible to cure. Curing an item of depreciation is economically feasible if the cost to cure is equal to or less than the anticipated increase in the value of the property that would result after curing the depreciation

Answer 44

Curable Depreciation

Question 45

Physical deterioration can be divided into 3 categories

Answer 45

Deferred maintenance
Short-lived items
Long-lived items

Question 46

Deferred maintenance is considered to be _______. Conversely, depreciation charged to the short-lived and long-lived items is _________.

Answer 46

curable; incurable

Question 47

This applies to items that are in need of immediate repair. These are items that should have been taken care of in the normal course of maintenance.

Answer 47

Deferred maintenance

Question 48

Items of wear and tear on a property that should be fixed now to protect the value or income- producing ability of the property, such as a broken window, a dead tree, a leak in the roof, or a faulty roof that must be completely replaced. These items are almost always curable.

Answer 48

Deferred Maintenance

Question 49

items are generally (but not always) relatively inexpensive items and will vary according to the type of building. They are things that a conscientious owner would take care of on a regular basis.

Answer 49

Deferred Mainenance

Question 50

A building component with an expected remaining economic life that is shorter than the remaining economic life of the entire structure.

Answer 50

Short-Lived Items

Question 51

An item that will probably be replaced one or more times during the life of the improvements, such as painting or flooring.

Answer 51

Short-Lived Items

Question 52

Short-lived items may still have some life at the time of the appraisal and would NOT need to be replaced immediately. Examples would include:

Answer 52

Roof covering
Water heaters
Carpeting
Furnaces

Question 53

A roof on a house has an expected life of 20 years. If the economic life of the house is 60 years, the roof might have to be replaced three or more times during the life span of the houses. So the roof covering would be a short-lived item. Now suppose we were appraising that house when it was 15 years old. We might estimate the cost to replace the roof at $4,000. That roof has lost a lot of its life, but there might be 5 years left in it. There is no need to replace it now, because we would just be throwing away money.
However, in the cost approach, we will have to measure its loss of utility and subtract that amount. Fifteen out of 20 years means it has lost .75 or 75% of its value. However, it still retains 25% of its original value.

Answer 53

$4,000 x .75 = $3,000 depreciation.

The roof still has a remaining value of $1,000, but the short-lived depreciation charged to the roof is $3,000.

Question 54

The deterioration in short-lived items is measured by an age-life ratio applied to the cost of each item. A 15-year-old boiler with an expected life of 25 years will have experienced depreciation of 15 / 25 or 60%.
If the replacement cost of the boiler is $8,000, the amount of short-lived depreciation attributable to the boiler would be:

Answer 54

$8,000 x .60 = $4,800

Question 55

When applying these age-life ratios we should be utilizing the ______ lives of those components‚ not the ________ life. In other words, how long can that dishwasher be expected to perform the function for which it was designed (i.e., cleaning dishes)?

Answer 55

useful; economic

Question 56

A building component or site improvement expected to have the same useful life as the entire structure

Answer 56

Long-Lived Items

Question 57

Long lived items include:

Answer 57

Framing
Foundation
Insulation
Underground pipes

Question 58

Long-lived items are often referred to as part of the “____ _______” of the building.

Answer 58

bone structure

Question 59

When totaling up the physical depreciation in a structure utilizing the breakdown method, we first address any _______ __________ items. There may be none identified.

Answer 59

deferred maintenance

Question 60

Let’s assume a total replacement cost of $200,000. A portion of that is accounted for by the cost of the short-lived items (the roof, furnace, water heater, etc.) and any deferred maintenance. The rest, by default, must be the cost of the long-lived items. It’s process of elimination, like the old saying goes, “If it isn’t one thing‚ it’s got to be the other!”

If we identify the total cost new of the short-lived items to be $50,000 (assume no deferred maintenance), then the cost of the long-lived items has to be $150,000 ($200,000 - $50,000).

Then, remember that the cost of the long-lived items will be depreciated over the remaining economic life of the whole structure. If we estimate the remaining economic life to be 45 years out of a total of 60 years, then the long-lived items have incurred a total depreciation, at this point in their lives, of 15/60 or 25%.

In this example, long-lived depreciation is therefore equal to

Answer 60

0.25 X $150,000, or $37,500.

Question 61

The house you are appraising has a total cost of $182,844. It is 22 years old and has an estimated remaining economic life of 28 years.

The cost to cure deferred maintenance items is $1,290.

Short lived items of depreciation have been identified; the depreciation attributable to these items is $3,530 and their cost is $12,300.

What is the amount of long-lived depreciation attributable to the building?

Answer 61

The house you are appraising has a total cost of $182,844. It is 22 years old and has an estimated remaining economic life of 28 years.
The cost to cure deferred maintenance items is $1,290 and they are 100% depreciated.
Short lived items of depreciation have been identified; the depreciation is $3,530 and the cost of these items is $12,300.

Total Cost $182,844
Minus Deferred maintenance cost - 1,290
Minus Short-lived items cost - 12,300
Cost of Long-lived items $169,254

Question 62

The house you are appraising has a total cost of $182,844. It is 22 years old and has an estimated remaining economic life of 28 years.

The cost to cure deferred maintenance items is $1,290.

Short lived items of depreciation have been identified; the depreciation attributable to these items is $3,530 and their cost is $12,300.

What is the total depreciation?

Answer 62

Total life = 22 + 28 = 50 years
Depreciation = 22 / 50 = .44 or 44%

Long-lived depreciation = $169,254 x .44 = $74,472

Long-lived Depreciation $74,472
Deferred maintenance cost to cure + 1,290
Short-lived Depreciation + 3,530

Total Depreciation $79,292

Question 63

The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.

Answer 63

Functional Utility

Question 64

The impairment of functional capacity of improvements according to market tastes and standards.

Answer 64

functional obsolescence

Question 65

There are five types of functional obsolescence:

Answer 65

Curable caused by a deficiency requiring an addition
Curable caused by a deficiency requiring substitution or modernization
Curable caused by a superadequacy
Incurable caused by a deficiency
Incurable caused by a superadequacy

Question 66

A type of depreciation; a diminution in value caused by negative external influences and generally incurable on the part of the owner, landlord, or tenant. The external influence may be either temporary or permanent

Answer 66

External obsolescence

Question 67

External obsolescence may be estimated by:

Answer 67

Analysis of market data and

Capitalization of income loss

Question 68

assume a house that would rent for $1,200 per month in a normal market. In this market that has experienced overbuilding, it can only bring $1,150 per month. The appropriate GRM is 120. What is the external obsolescence?

Answer 68

$50 (rent loss) x 120 = $6,000 (external obsolescence)

Question 69

Assume a house that would rent for $1,200 per month in a normal market. In this market that has experienced overbuilding, it can only bring $1,150 per month. The appropriate GRM is 120. What is the external obsolescence?

Answer 69

$50 (rent loss) x 120 = $6,000 (external obsolescence)

Question 70

A hot water furnace in a building costs $22,000 to replace. It has an expected life of 30 years, and it is 24 years old. How much short­lived depreciation is attributable to this item?

Answer 70

$17,600

24 / 30 = 80%. $22,000 x 80% = $17,600.

Question 71

A property is found to suffer $20,000 in external obsolescence because of its proximity to an industrial plant. The subject’s land represents 20% of its value. What is the dollar amount of external obsolescence attributable to the building improvements?

Answer 71

$16,000

$20,000 x 80% = $16,000. The remaining $4,000 in external obsolescence is attributable to the land.

Question 72

When estimating depreciation, which of these items is likely to be considered a long-lived item?

furnace
roof covering
girders
water heater

Answer 72

girders

The building’s framing members, including girders, would be long-lived items. The other items will likely need to be replaced during the building’s life.

Question 73

What term is defined as “Items of wear and tear on a property that should be fixed now to protect the value or income- producing ability of the property”?

functional obsolescence
short-lived depreciation
long-lived depreciation
deferred maintenance

Answer 73

deferred maintenance

Question 74

True or False: Physical deterioration can be divided into three categories: deferred maintenance; short-lived components; and long-lived components.

Answer 74

True

Question 75

1 of 10
The replacement cost new of the improvements is $295,500, the land value is $75,000 and the effective age is 17 years. The total economic life is estimated to be 60 years. The subject has deferred maintenance items that total $5,500. After these repairs, the effective age will be reduced to 15 years. What is the value of the property using a modified age-­life method?

Answer 75

$292,500

Modified Age-Life Method. $295,500 - $5,500 = $290,000.
15 ÷ 60 = .25.
$290,000 X .75 = $217,500. $217,500 + $75,000 = $292,500.

Question 76

“The period over which improvements to real estate contribute to property value” is the definition of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ life.
economic
physical
useful
actual

Answer 76

economic

Question 77

“The impairment of functional capacity of improvements according to market tastes and standards” is the definition of

depreciation
physical deterioration
functional obsolescence
external obsolescence

Answer 77

functional obsolescence

Question 78

Which of these factors is most likely to cause external obsolescence to a residential property?

A roof that shows obvious signs of deterioration but is not yet leaking
A gas station/convenience store located across the street
A kitchen design that does not meet current market tastes and expectations
All of these are examples of external obsolescence

Answer 78

A gas station/convenience store located across the street

Question 79

External obsolescence can be

marketwide
based on an outdated finish item
the result of a layout deficiency
the result of a construction defect

Answer 79

marketwide

Question 80

Which would NOT be a deferred maintenance item?

broken window pane
older roof showing some wear
peeling paint on window trim
leaking faucet

Answer 80

older roof showing some wear

Question 81

“The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed” is the definition of __________ life.

incurable
physical
useful
actual

Answer 81

useful

Question 82

The three general types of depreciation are:

Physical, short-lived, and long-lived
Curable, incurable and breakdown
Physical, functional, and external
Functional, curable, and incurable

Answer 82

physical, functional, external

Question 83

A 12 year old roof with an expected life of 20 years would have experienced depreciation of $\_\_\_\_\_\_ if the cost new of the roof is 
$8,000.
$3,200
$4,200
$4,800
$6,000

Answer 83

$4800

12/20 = .6
.6 x 8000 = 4800

Question 84

Of the three general types of depreciation, which type occurs off the site?

curable
short-lived
physical
external

Answer 84

external

Question 85

Which is NOT an example of a long-lived item?
water heater
framing
foundation
underground pipes

Answer 85

water heater

Question 86

Economic feasibility is indicated if the __________ is ______________ the ______________ of the property.

cost, greater than, value
price, equal to or less than, cost
cost to cure, equal to or less than, anticipated increase in value
cost to cure, more than, actual increase in value

Answer 86

cost to cure, equal to or less than, anticipated increase in value

Question 87

“The ability of a property or building to be useful and perform the function for which it was intended according to current market tastes and standards” is the definition of __________________.

functional obsolescence
functional utility
functional inutility
useful life

Answer 87

functional utility

Question 88

The amount of depreciation attributed to deferred maintenance is measured by

the cost to build a new structure
the cost to cure the deferred maintenance item
the cost of long-lived items divided by the ratio of effective age to total economic life
chronological age divided by total economic life

Answer 88

the cost to cure the deferred maintenance item

Question 89

Assume a house would rent for $1,000 per month in a normal neighborhood. In this neighborhood, which is near a busy interstate highway, it can only rent for $950 per month. The appropriate GRM is 135. How much external obsolescence is caused by the highway?

$4,200
$4,750
$5,550
$6,750

Answer 89

$6,750

1000-950 = 50

50 x 135 = 6750

Question 90

The subject is a 15 year old duplex that would cost $240,000 to build new today. It is in good condition and you estimate the effective age to be 10 years. Your estimate of total economic life is 50 years. Its land value is $60,000. What is its value by the cost approach?

Answer 90

$252,000

Cost Approach Using Age- Life Method.
10 ÷ 50 = .20.
$240,000 X .80 = $192,000. $192,000 + $60,000 = $252,000.