Question

Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $85,000, on average. Due to the subject property's age, physical deterioration to the building accounts for an estimate of $65,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $25,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence?

Answer 1

Answer: $85,000

External obsolescence means the situation where the value of the property is lost due to external factors to such property. Some of the external factors that can cause obsolescence are:

• Economics of the industry
• Passage of new legislation
• Reduced demand

It must be noted that factors for external obsolescence are out of the hands for any individual to control and are majorly driven y the market forces.

In the given case, physical deterioration to the building for an estimate of $65,000 in lost value is not due to external factors but due to the ignorance of the individual to not maintain the property. Similarly $25,000 lost value is because the individual has not updated the floor plan as per the current homebuyers' preferences. However dramatic shift in the perceived safety of the neighborhood has caused the values of all residential properties in the neighborhood to fall by an average of $85,000. This event is out of the hands of a particular individual and cannot be controlled by a single person, there by making it an external factor for obsolescence.