Definition: Incurable Depreciation or Obsolescence
Incurable Depreciation or Obsolescence refers to a defect or deterioration in a property that cannot be rectified or is not economically viable to fix. This type of depreciation typically involves significant structural problems or design flaws that are integral to the building, making repairs either not possible or much more costly than the increase in market value that the repairs would yield. These defects contrast with curable depreciation, where the cost of making necessary repairs is justified by the resulting increase in property value.
Examples of Incurable Depreciation or Obsolescence
- Poor Floor Plan: If a home’s layout is awkward or inconvenient, reconfiguring the floor plan could be prohibitively expensive relative to the increase in market value.
- Example: A house that could sell for an additional $5,000 with a more practical floor plan, but the cost to rearrange the structure is $10,000.
- Foundation Issues: Significant foundation problems can often be beyond economically feasible repair, as the cost can easily surpass any added value from fixing the issue.
- Obsolete Facilities: Buildings designed for specific, outdated uses (e.g., a factory from the early 20th century) may require extensive alterations that are not financially practical compared to the structure’s overall value.
Frequently Asked Questions (FAQs)
What is the primary distinction between curable and incurable depreciation?
Curable depreciation refers to defects or deterioration that can be rectified economically and add value to the property, whereas incurable depreciation involves defects that cannot be economically fixed or the cost of rectifying exceeds the value increase.
Can incurable depreciation lead to complete property loss?
While rare, extreme cases of incurable depreciation, such as severe structural issues, can lead to a loss in total usability or safety of a property, essentially leading to its condemnation.
How does incurable depreciation affect property value?
Incurable depreciation negatively impacts a property’s market value because the costs associated with rectifying such defects surpass any potential value gain.
There might be tax write-offs for repairs and deprecations, but incurable depreciation typically does not provide immediate tax relief unlike curable depreciation repair costs which might be deductible.
Curable Depreciation
Issues with a property that can be economically fixed with the repair cost being justified by an increase in property value.
Functional Obsolescence
A decrease in property value due to outdated design or features, which may or may not be curable depending on economic feasibility.
Economic Obsolescence
Loss of property value due to external factors unrelated to the property itself, such as changes in the neighborhood or economic conditions.
Online Resources
References
- FHA Single-Family Housing Policy Handbook (HUD Handbook 4000.1)
- Appraisal of Real Estate, 14th Edition, by Appraisal Institute
- Internal Revenue Code Section 167 - Depreciation
Suggested Books for Further Studies
- “The Appraisal of Real Estate” by Appraisal Institute
- “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
- “Investing in Real Estate” by Gary W. Eldred
Real Estate Basics: Incurable Depreciation or Obsolescence Fundamentals Quiz
### What characterizes incurable depreciation or obsolescence?
- [ ] Defects that increase in value over time.
- [x] Defects that cannot be rectified or are not economically viable to fix.
- [ ] Issues that relate specifically to the property's location.
- [ ] Wear and tear rectifiable by simple, low-cost repairs.
> **Explanation:** Incurable depreciation or obsolescence involves defects that are integral to the property and either can't be fixed or would cost more to fix than the increased value they would bring.
### Can incurable depreciation affect both residential and commercial properties?
- [x] Yes, it can affect both types.
- [ ] No, it only applies to commercial properties.
- [ ] Only residential properties experience this.
- [ ] Depreciation only pertains to personal-use properties.
> **Explanation:** Incurable depreciation can impact any type of property, whether residential or commercial, by rendering certain defects unfeasible to repair economically.
### What is an example of incurable functional obsolescence?
- [ ] Updating outdated paint colors.
- [x] Reconfiguring an impractical floor plan costing more than the added value.
- [ ] Fixing a malfunctioning door.
- [ ] Replacing old carpet.
> **Explanation:** An impractical floor plan that is very costly to reconfigure refers to incurable functional obsolescence as the cost of adjustment exceeds the resultant value addition.
### How does incurable depreciation typically influence property valuation by appraisers?
- [x] It results in lower property value assessments.
- [ ] It increases the property value due to unique defects.
- [ ] It has no effect on the property's valuation.
- [ ] It makes the property ineligible for official appraisal.
> **Explanation:** Appraisers typically reduce the value assessment of properties exhibiting incurable depreciation due to the costly or impossible nature of the defects.
### Which of these is NOT an example of incurable depreciation?
- [ ] Foundational cracks requiring complete rebuilding.
- [ ] Obsolete building design.
- [ ] Poor neighborhood quality reducing appeal.
- [x] Peeling paint and minor plumbing issues.
> **Explanation:** Peeling paint and minor plumbing issues are examples of curable depreciation because they are relatively cost-effective to repair and thus addressable.
### Why might a property with incurable obsolescence not be preferred for real estate investment?
- [x] High cost of impractical repairs lowering ROI.
- [ ] Depreciation increases over time.
- [ ] All types of depreciation enhance property value.
- [ ] It makes properties ineligible for loans.
> **Explanation:** Investors generally avoid properties with incurable obsolescence due to the high and impractical costs of repairs which reduce the return on investment.
### What economic factor cannot rectify incurable depreciation?
- [ ] Improved technology.
- [ ] Increased demand.
- [ ] Enhanced luxury features.
- [x] Major structural redesigns that don’t justify value increments.
> **Explanation:** Large-scale structural redesigns that do not justify the resultant increased property value are a hallmark of incurable depreciation and thus remain uneconomically feasible.
### Who evaluates and appraises incurable depreciation factors in a property?
- [ ] Local zoning officers.
- [ ] Real estate agents.
- [x] Professional property appraisers.
- [ ] Utility companies.
> **Explanation:** Professional property appraisers are responsible for evaluating and considering incurable depreciation in their property value assessments.
### What kind of building issues are likely candidates for incurable depreciation?
- [x] Integral structural issues like load-bearing wall damage.
- [ ] Fresh paint job needs.
- [ ] Modern light fixture upgrades.
- [ ] Replacement of patio furnishings.
> **Explanation:** Issues like load-bearing wall damage are integral and significant, making them primary candidates for incurable depreciation.
### Which term relates closely to incurable depreciation in the context of external property conditions?
- [ ] Rent Control
- [x] Economic Obsolescence
- [ ] Boundary Adjustment
- [ ] Functional Sufficiency
> **Explanation:** Economic obsolescence relates externally detrimental conditions not inherently within the property that affect its value, often overlapping with incursions of incurable depreciation.
