Certified Residential Appraiser Practice Exam

What causes losses in property value that are beyond the control of the property owner?

1. Direct obsolescence

2. Functional obsolescence

3. External obsolescence

4. Contractual obsolescence

The correct answer is: External obsolescence

The correct answer highlights the concept of external obsolescence, which refers to losses in property value resulting from factors outside the property owner’s control. This phenomenon can occur due to various external influences such as changes in the neighborhood, economic downturns, environmental issues, or the development of undesirable facilities nearby, like factories or busy highways. These factors negatively impact the desirability and functionality of the property but are not related to the condition or design of the property itself. For instance, if a new industrial complex is built next to a residential area, it may lead to noise, pollution, or increased traffic, all of which can lower the value of nearby homes despite the owners' efforts to maintain or improve their properties. While direct obsolescence and functional obsolescence are related to the property itself—terms that address issues like deferred maintenance or outdated designs—external obsolescence focuses specifically on external conditions. Contractual obsolescence falls outside typical industry terminology and isn't a recognized cause of loss in property value. Understanding these distinctions helps in identifying the different factors that can affect property values.