SAEE Cost Approach and Depreciation 3 — Questions and Answers
Question 1: Accrued depreciation in the cost approach is best defined as:
- The annual tax deduction for the building
- The total loss in value from all causes as of the appraisal date (Correct answer)
- The land's loss in value over time
- Future repair costs
Correct answer: The total loss in value from all causes as of the appraisal date
Accrued depreciation is the difference between cost new and current value, reflecting all losses to date.
Question 2: The three major categories of depreciation recognized in appraisal are:
- Tax, accounting, and market
- Physical, functional, and external (Correct answer)
- Land, building, and site
- Curable, incurable, and economic
Correct answer: Physical, functional, and external
Depreciation is categorized as physical deterioration, functional obsolescence, and external obsolescence.
Question 3: A worn-out roof that can be economically repaired is an example of:
- Incurable physical deterioration
- Curable physical deterioration (Correct answer)
- Functional obsolescence
- External obsolescence
Correct answer: Curable physical deterioration
A roof that is cost-effective to replace represents curable physical deterioration.
Question 4: Depreciation is considered 'incurable' when:
- The defect cannot be physically fixed
- The cost to cure exceeds the value added (Correct answer)
- It results from external factors
- The improvement is brand new
Correct answer: The cost to cure exceeds the value added
An item is incurable when the cost to correct it is greater than the value it would add.
Question 5: A four-bedroom house with only one bathroom suffers primarily from:
- Physical deterioration
- Functional obsolescence (Correct answer)
- External obsolescence
- Land depreciation
Correct answer: Functional obsolescence
An inadequate or outdated layout such as too few bathrooms is functional obsolescence.
Question 6: A home that declines in value because a landfill opened nearby suffers from:
- Curable functional obsolescence
- Physical deterioration
- External (economic) obsolescence (Correct answer)
- Entrepreneurial loss
Correct answer: External (economic) obsolescence
Loss caused by factors outside the property boundary is external obsolescence.
Question 7: Which type of depreciation is almost always considered incurable?
- Deferred maintenance
- External obsolescence (Correct answer)
- A leaking faucet
- Peeling exterior paint
Correct answer: External obsolescence
External obsolescence is generally incurable because the owner cannot fix off-site causes.
SAEE Cost Approach and Depreciation 3
Accrued depreciation in the cost approach is best defined as: