- Official section
- National III.C: Cost Approach and Depreciation
- Broker weight
- Part of 8% of the national portion
- Expected scored items
- The current PSI broker outline assigns about 8 of 100 scored national items to Valuation and Market Analysis
Valuation and Market Analysis exam concept
The three types of appraisal depreciation
Worn out, works poorly, harmed from outside. Physical deterioration concerns condition. Functional obsolescence concerns design or utility within the property. External obsolescence concerns influences beyond the property. Curable versus incurable is a second question based on economics and control, not a fourth depreciation type.
Last updated: August 1, 2026
What is the difference at a glance?
Short answer: Classify the source first. Physical deterioration comes from wear, age, damage, or deferred maintenance. Functional obsolescence comes from the property's own design, layout, equipment, capacity, deficiency, or superadequacy. External obsolescence comes from outside influences such as incompatible land use, noise, environmental conditions, or market decline. Then classify curability. A defect is curable when correction is economically justified, not simply possible. It is incurable when the source cannot be corrected by the owner or the correction costs more than the value it would restore. In the cost approach, accrued depreciation from all causes is deducted from replacement or reproduction cost new.
Depreciation estimates are market conclusions, not a home-inspection checklist. A condition can affect safety, repair cost, marketability, remaining life, and value in different amounts. Current Fannie Mae guidance expects cost-approach depreciation to remain consistent with observed external and functional conditions. The current 2024 USPAP remains the edition identified by the Appraisal Foundation as of August 1, 2026. Examples here teach classification and do not prescribe appraisal adjustments.
What changes from one term to the next?
- Terms
- Physical deterioration vs. functional obsolescence
- Difference
- Physical deterioration concerns wear, damage, or material condition. Functional obsolescence concerns inadequate or excessive design and utility within the property.
- Question cue
- Worn out versus works poorly.
- Terms
- Functional vs. external obsolescence
- Difference
- Functional obsolescence originates in the property. External obsolescence originates outside it.
- Question cue
- Inside source versus outside source.
- Terms
- Curable vs. incurable
- Difference
- Curable means correction is economically justified. Incurable means correction is unavailable, outside control, or costs more than the market benefit.
- Question cue
- Worth fixing versus not worth or not able to fix.
- Terms
- Deferred maintenance vs. normal wear
- Difference
- Deferred maintenance is repair or replacement that has been postponed. Normal wear describes condition change that may not yet require immediate correction.
- Question cue
- Past-due work versus ordinary aging.
- Terms
- Functional inadequacy vs. superadequacy
- Difference
- An inadequacy provides less utility than the market expects. A superadequacy provides more costly capacity or quality than the market supports.
- Question cue
- Too little versus economically too much.
- Terms
- Actual age vs. effective age
- Difference
- Actual age counts years since construction. Effective age reflects condition, maintenance, renovation, utility, and market perception.
- Question cue
- Calendar age versus market age.
- Terms
- Economic life vs. physical life
- Difference
- Economic life lasts while the improvement contributes to property value under its use. Physical life lasts while the structure can physically remain usable.
- Question cue
- Profitable usefulness versus physical survival.
- Terms
- Accrued depreciation vs. tax depreciation
- Difference
- Accrued appraisal depreciation is market value loss from all causes. Tax depreciation is an accounting deduction governed by tax law and recovery periods.
- Question cue
- Market loss versus tax allocation.
- Terms
- Cost to cure vs. depreciation amount
- Difference
- Cost to cure is the expenditure required for correction. Depreciation is the value loss, which may be higher, lower, or equal depending on market reaction.
- Question cue
- Repair bill versus value effect.
- Terms
- External obsolescence vs. poor maintenance
- Difference
- External obsolescence comes from outside influences. Poor maintenance is a property-condition issue classified as physical deterioration.
- Question cue
- Neighborhood or market cause versus owner-controlled condition.
How does the distinction change the answer?
Worn roof covering
Scenario: A roof covering is beyond its expected useful life. Replacement costs $14,000, and market evidence shows buyers discount the property by at least that amount plus related risk.
- The source is material condition, so the category is physical deterioration.
- The component is short-lived relative to the structure.
- The repair is economically justified on the assumed market evidence.
Answer: This is curable physical deterioration.
Settled structural foundation
Scenario: An older building has major structural settlement. Stabilization would cost more than the market value it would restore, though an engineer says repair is physically possible.
- The defect concerns the building's physical structure.
- Physical possibility does not establish economic curability.
- The assumed cost exceeds the supported value benefit.
Answer: This is incurable physical deterioration on the stated economics.
Obsolete room access
Scenario: The only way to reach one bedroom is through another bedroom, and buyers consistently discount the layout. A modest reconfiguration can correct it for less than the value restored.
- The problem arises from internal layout and utility.
- It is not ordinary wear or an outside influence.
- Correction is economically justified under the assumed facts.
Answer: This is curable functional obsolescence.
Oversized commercial system
Scenario: A small building contains a costly industrial mechanical system far beyond users' needs. Removal and replacement would cost more than the value gained.
- The system provides excessive capacity relative to market demand.
- The loss is a functional superadequacy.
- The cure is not economically justified on the assumed figures.
Answer: This is incurable functional obsolescence.
Aircraft noise
Scenario: Comparable evidence shows homes within a persistent airport noise contour sell below otherwise similar homes outside it.
- The source is outside each individual property.
- One owner cannot move the airport or noise contour.
- Market sales provide a way to estimate the locational effect.
Answer: This is external obsolescence, commonly incurable by the individual owner.
Effective age after renovation
Scenario: A 45-year-old building has a new roof, systems, interiors, and modern layout. Market evidence supports an effective age of 18 years and a 60-year economic life.
- Actual age remains 45 years.
- Condition and utility support a younger effective age.
- A simplified age-life ratio would use 18 divided by 60, not 45 divided by 60, if that method is appropriate.
Answer: The simplified effective-age ratio is 30% of cost new before separate refinements.
The S-O-U-R-C-E depreciation test
- Source: locate the cause in physical condition, internal design or utility, or an external influence.
- Observation: document the actual defect, deficiency, superadequacy, location effect, market condition, and date without overstating cause.
- Utility: explain how the issue changes use, appeal, income, expense, remaining life, marketability, or buyer behavior.
- Repair: identify what correction would require, who controls it, legal feasibility, related work, downtime, and total cost.
- Contribution: compare cost to cure with the value or income benefit the market would recognize.
- Classification: label physical, functional, or external, then curable or incurable, temporary or persistent, and short-lived or long-lived where relevant.
- Evidence: support the value loss through market extraction, age-life, breakdown, cost-to-cure, rent-loss capitalization, or another credible method.
- Type
- Physical deterioration
- Source
- Condition
- Example
- Worn roof
- Common curability
- Can be curable or incurable
- Type
- Functional obsolescence
- Source
- Design or utility
- Example
- Poor room layout
- Common curability
- Can be curable or incurable
- Type
- External obsolescence
- Source
- Outside influence
- Example
- Highway noise
- Common curability
- Often incurable by owner
Where do similar terms create traps?
- Trap
- Calling all depreciation physical
- Correction
- Loss can arise from condition, internal utility, or external influences.
- Trap
- Calling depreciation an accounting deduction
- Correction
- Appraisal depreciation measures market value loss from cost new, not a tax recovery schedule.
- Trap
- Calling every repairable item curable
- Correction
- Curability is economic; compare total correction cost with the market-supported benefit.
- Trap
- Calling every old feature physical deterioration
- Correction
- An intact but obsolete layout or system can be functional obsolescence rather than physical wear.
- Trap
- Calling a superadequacy a benefit only
- Correction
- A feature can be physically excellent yet functionally excessive when buyers will not pay for its cost.
- Trap
- Calling traffic noise functional obsolescence
- Correction
- Traffic noise originates outside the property and is analyzed as external obsolescence when it causes value loss.
- Trap
- Saying external obsolescence is always permanent
- Correction
- The source is outside the property, but its duration can be temporary, cyclical, or persistent.
- Trap
- Equating actual age and effective age
- Correction
- Actual age counts years; effective age reflects current condition and utility as recognized by the market.
- Trap
- Equating physical and economic life
- Correction
- A structure may survive physically after its improvement no longer contributes enough value in its present use.
- Trap
- Assuming repair cost equals value loss
- Correction
- Cost to cure and market depreciation are separate figures that require evidence.
- Trap
- Deducting building depreciation from land
- Correction
- Apply accrued improvement depreciation to cost new and value land separately in the cost approach.
- Trap
- Diagnosing defects as a broker
- Correction
- Report observed facts and obtain qualified inspection, engineering, environmental, contracting, or appraisal analysis.
Can you separate the terms in a new fact pattern?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. Peeling paint and a worn roof reduce a property's value. Which category fits best?
- Physical deterioration
- Functional obsolescence
- External obsolescence
- Appreciation
Show answer and explanation
Answer: Physical deterioration
Both conditions concern wear or deferred maintenance of the improvements.
2. A house has an intact but obsolete layout that requires walking through one bedroom to reach another. Which category fits?
- External obsolescence
- Functional obsolescence
- Physical deterioration
- Tax depreciation
Show answer and explanation
Answer: Functional obsolescence
The value loss comes from internal design and utility rather than physical wear or an outside influence.
3. Comparable evidence shows a persistent value loss caused by nearby airport noise. What type is this?
- Physical deterioration
- Functional inadequacy
- External obsolescence
- Deferred maintenance
Show answer and explanation
Answer: External obsolescence
The airport noise source lies outside the subject property and individual owner's control.
4. A repair costs $8,000 and is expected to restore $15,000 of value. Assuming all related costs are included, how is the item most likely classified?
- Curable
- Incurable
- External only
- Not depreciation
Show answer and explanation
Answer: Curable
The supported value benefit exceeds the complete cost to cure, making correction economically justified on the stated facts.
5. A 30-year-old building is fully renovated and competes like a 10-year-old building. Which age is 30 years?
- Effective age
- Actual age
- Remaining life
- Economic rent
Show answer and explanation
Answer: Actual age
Actual age is time since construction. The market-supported effective age on these facts is closer to 10 years.
Where do these ideas appear on the outline?
- Topic
- Accrued depreciation
- What to know
- Loss in value, all causes, cost new, current date, physical deterioration, functional obsolescence, external obsolescence, observed condition, market reaction, estimate, deduction, and cost approach
- Best exam move
- Subtract total supported accrued depreciation from improvement cost new, not from land value.
- Topic
- Physical deterioration
- What to know
- Age, use, wear, weather, damage, decay, rust, rot, cracking, leakage, settlement, deferred maintenance, component failure, and remaining life
- Best exam move
- Choose physical deterioration when the problem is the improvement's material condition.
- Topic
- Deferred maintenance
- What to know
- Needed repair, postponed work, peeling paint, broken window, roof leak, worn finish, damaged fixture, neglected system, inspection, cost to cure, market resistance, and safety
- Best exam move
- Treat a postponed repair as physical deterioration, then decide whether cure is economically feasible.
- Topic
- Short-lived physical items
- What to know
- Roof covering, furnace, water heater, appliance, floor covering, paint, fixture, component life, remaining life, replacement cycle, cost new, depreciation, and separate analysis
- Best exam move
- A short-lived item wears out sooner than the main structure and can be estimated separately in a breakdown method.
- Topic
- Long-lived physical items
- What to know
- Foundation, framing, exterior wall, structural system, main building, total economic life, effective age, remaining economic life, age-life analysis, incurable deterioration, and maintenance
- Best exam move
- Long-lived does not mean no depreciation; it means the component's expected life is tied more closely to the structure.
- Topic
- Functional obsolescence
- What to know
- Design, layout, utility, capacity, ceiling height, room relationship, bathroom count, electrical service, HVAC, parking ratio, floor plate, access, technology, market standard, and internal source
- Best exam move
- Choose functional when the property itself works less effectively for current market users.
- Topic
- Functional inadequacy
- What to know
- Missing feature, undersized system, too few fixtures, narrow doorway, no elevator, inadequate storage, insufficient parking, obsolete equipment, poor bedroom access, low power, and value loss
- Best exam move
- An inadequacy gives the property less utility than buyers expect.
- Topic
- Functional superadequacy
- What to know
- Excess feature, overimprovement, oversized system, luxury finish, unnecessary thickness, excessive height, costly material, underused capacity, market ceiling, contribution, and unrecovered cost
- Best exam move
- A superadequacy costs more than the market recognizes and can create functional loss even though it sounds superior.
- Topic
- External obsolescence
- What to know
- Outside property, traffic, noise, airport, railroad, incompatible neighbor, environmental stigma, view obstruction, economic decline, employer closure, oversupply, rent decline, tax burden, regulation, and market area
- Best exam move
- Choose external when the source lies beyond the property's boundaries or individual owner's control.
- Topic
- Locational external obsolescence
- What to know
- Busy road, industrial adjacency, landfill, transmission corridor, flood perception, noise contour, nuisance, poor access, crime evidence limits, view, stigma, sale comparison, and rent loss
- Best exam move
- Tie location influence to market evidence rather than assuming every nearby use causes a loss.
- Topic
- Economic external obsolescence
- What to know
- Employment decline, population loss, excess supply, weak demand, rent compression, expense increase, tax change, regulatory burden, industry contraction, capital market, vacancy, and market cycle
- Best exam move
- A market-wide income or demand problem can create external loss even when the building is physically sound.
- Topic
- Curable test
- What to know
- Cost to cure, value restored, contribution, market expectation, immediate repair, deferred repair, permits, related work, downtime, financing, feasibility, and no physical-possibility-only test
- Best exam move
- Call the item curable when the market-supported benefit justifies correction under the selected method.
- Topic
- Incurable test
- What to know
- Cost exceeds benefit, outside owner control, structural integration, legal prohibition, no feasible change, remaining life, market acceptance, external source, persistent loss, and economic judgment
- Best exam move
- Call the item incurable when the owner cannot economically or practically eliminate the source.
- Topic
- Actual and effective age
- What to know
- Construction date, chronological age, condition, renovation, maintenance, utility, market perception, effective age, remaining economic life, total economic life, and age-life method
- Best exam move
- Use actual age for time since construction and effective age for market-observed condition and utility.
- Topic
- Economic, physical, and remaining life
- What to know
- Physical survival, economic usefulness, highest and best use, demolition, conversion, remaining economic life, component life, maintenance, obsolescence, market demand, and no age equality assumption
- Best exam move
- A building can remain physically usable after its current improvement no longer represents the land's most productive economic use.
- Topic
- Depreciation measurement
- What to know
- Market extraction, age-life, breakdown method, observed condition, cost to cure, capitalized rent loss, paired sales, land support, cost source, effective date, consistency, and no unsupported percentage
- Best exam move
- Match the method to available market and cost evidence rather than applying a universal age discount.
- Topic
- Consistency across approaches
- What to know
- Sales adjustments, condition rating, functional feature, external influence, rent loss, vacancy, expense, capitalization, cost depreciation, site description, marketability, reconciliation, and report explanation
- Best exam move
- A disclosed adverse condition should appear consistently wherever it affects sales, cost, income, and reconciliation.
- Topic
- Broker communication
- What to know
- Observed defect, no engineering conclusion, no appraisal adjustment, inspection recommendation, repair estimate source, contractor, appraiser, engineer, environmental professional, disclosure duty, client decision, and no return-on-cost promise
- Best exam move
- Identify the visible fact and its possible transaction relevance without diagnosing cause or inventing value loss.
How do you make the distinction stick?
- Session
- Session 1
- Focus
- Own condition, utility, and outside
- Proof you are ready
- Classify 24 defects as physical, functional, or external with one sentence explaining the source.
- Session
- Session 2
- Focus
- Separate curable and incurable
- Proof you are ready
- Compare cost to cure, value restored, legal feasibility, and owner control in 16 scenarios.
- Session
- Session 3
- Focus
- Master physical components
- Proof you are ready
- Sort 18 items into deferred maintenance, short-lived, long-lived, and no proven depreciation.
- Session
- Session 4
- Focus
- Control functional vocabulary
- Proof you are ready
- Resolve 12 layout, capacity, missing-feature, obsolete-equipment, overbuilding, and superadequacy cases.
- Session
- Session 5
- Focus
- Control age and life
- Proof you are ready
- Calculate actual age, effective age ratios, remaining economic life, and cost-approach deductions in 10 problems.
- Session
- Session 6
- Focus
- Run the S-O-U-R-C-E test
- Proof you are ready
- Score at least 90% and state source, observation, utility, repair, contribution, classification, and evidence for every miss.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
Turn the comparison into a test-day decision
From concept to decision
Drill this topic, then review the explanation
Pass Illinois gives you original national and Illinois questions, topic-by-topic study, clear explanations, timed practice, flashcards, progress tracking, and Math Coach. Start free, find the weak distinction, and focus the next session there.
Questions students ask about Physical vs. Functional vs. External Depreciation
What is depreciation in real estate appraisal?
Depreciation is loss in value from any cause, measured from current cost new in the cost approach. It includes physical deterioration, functional obsolescence, and external obsolescence. Appraisal depreciation is not the same as accounting or income-tax depreciation, and it can affect property that has not reached the end of its physical life.
What is physical deterioration?
Physical deterioration is value loss from wear, age, damage, deferred maintenance, weather, decay, or component failure. Worn roofing, peeling paint, foundation damage, old flooring, corroded piping, and a failing furnace are examples. The appraiser analyzes whether repair is economically justified and how the market reacts.
What is functional obsolescence?
Functional obsolescence is loss in value caused by a defect, deficiency, or superadequacy within the property. An obsolete layout, too few bathrooms, low ceiling height, inadequate electrical capacity, poor traffic flow, or an improvement more elaborate than buyers support can reduce utility and value.
What is external obsolescence?
External obsolescence is value loss caused by influences outside the property. Heavy traffic, aircraft noise, nearby incompatible land use, environmental stigma, employment decline, excess market supply, or a location-wide rent decline can be examples. The property owner usually cannot cure the source alone.
What is curable depreciation?
Depreciation is curable when correcting the problem is economically feasible, often because the expected increase in value is at least as great as the cost to cure. A curable item is not merely physically repairable. Economic judgment, market expectations, timing, and related work matter.
What is incurable depreciation?
Depreciation is incurable when correction is physically impossible, legally unavailable, outside the owner's control, or economically unjustified because the cost exceeds the value benefit. External obsolescence is commonly incurable for an individual owner, while physical and functional issues can fall into either category.
What is a superadequacy?
A superadequacy is a feature that exceeds what the market requires and does not contribute value equal to its cost. An extremely expensive structural system, commercial-grade finish, oversized mechanical plant, or excessive square footage can be a functional problem when typical buyers will not pay for the extra capacity.
What is effective age versus actual age?
Actual age is the number of years since construction. Effective age reflects the improvement's condition, utility, renovation, and market perception. A well-renovated 40-year-old building might have an effective age of 15 years, while neglected newer construction might have an older effective age than its calendar age suggests.
Is external obsolescence always permanent?
No. It is often incurable by the owner, but an external influence can be temporary or permanent. A short-term excess supply, temporary road construction, or cyclical market weakness can change, while a fixed adverse location may persist. Duration and market evidence must be analyzed rather than assumed.
Are these official PSI questions?
No. They are original questions aligned to the national Valuation and Market Analysis outline effective June 24, 2026. Current USPAP, Fannie Mae appraisal guidance, and HUD valuation material recognizing physical, functional, and external depreciation were reviewed through August 1, 2026.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- The Appraisal Foundation, current 2024 Uniform Standards of Professional Appraisal Practice
- Fannie Mae Selling Guide B4-1.3-10, current cost-approach depreciation guidance
- Fannie Mae Selling Guide B4-1.3-06, current condition and construction-quality guidance
- HUD Section 232 valuation guidance, physical, functional, and external obsolescence analysis
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.