Where this fits on the exam
| Official syllabus topic | Valuation and Market Analysis: Cost Approach; Depreciation and Obsolescence |
|---|---|
| Official PSI area | Valuation and Market Analysis |
| Published weight | 8% of the national portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes a weight for the complete official area, not a guaranteed count for this individual comparison. Use the source, document, actor, event, and timing stated in the question before applying a memorized definition.
Side-by-side comparison
Read across each row. The terms are deliberately compared on identical dimensions so the difference remains clear when the exam hides the vocabulary inside a scenario.
| Decision dimension | Physical | Functional | External |
|---|---|---|---|
| Source | Wear, age, damage, or deferred maintenance | Design, layout, capacity, or feature inadequacy | Condition outside the property |
| Example | Worn roof | Poor floor plan or obsolete system | Nearby highway noise or regional employment loss |
| Curability | Compare cure cost with value restored | Compare cure cost with value restored | Usually outside the owner's control |
| Cost-approach role | Deduction from improvement cost | Deduction from improvement utility | Deduction reflecting external market loss |
Decision rule
Georgia-specific distinction
Worked example
Scenario. A house loses value after a noisy limited-access highway opens beside the subdivision.
Reason it through. The cause is outside the property and an individual owner cannot relocate the highway.
Answer. The loss is external obsolescence and is usually incurable by the owner.
Common exam traps
- Calling every old feature physical
- Treating curable as physically possible
- Assuming external loss is permanent in every market
- Subtracting depreciation from land in the ordinary cost formula
Original practice questions with detailed explanations
These are original instructional questions mapped to the July 1, 2026 PSI outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1A house loses value after a noisy limited-access highway opens beside the subdivision. What type of depreciation is this?
- A. Physical deterioration
- B. Functional obsolescence
- C. Deferred maintenance
- D. External obsolescence
Show answer and explanation →
Answer: D. External obsolescence
External obsolescence is a loss in value caused by something outside the property. The highway is off the lot and beyond the owner's control, so the loss is usually incurable. Functional obsolescence is plausible because buyers dislike the result, but that category covers problems with the property's own design.
- A. Incorrect. No wear or damage to the house is described. The cause is the neighboring highway.
- B. Incorrect. Functional obsolescence comes from the property's own design or features. The highway is outside the property.
- C. Incorrect. Deferred maintenance involves postponed upkeep. The owner's maintenance choices did not create the highway.
- D. Correct. The value loss comes from an external neighborhood influence outside the property. That is external obsolescence.
Question 2A four-bedroom house has only one bathroom, and buyers in the area expect at least two. What type of depreciation does this represent?
- A. Functional obsolescence
- B. Physical deterioration
- C. External obsolescence
- D. Regression
Show answer and explanation →
Answer: A. Functional obsolescence
Functional obsolescence comes from a design, layout, or feature problem in the property itself. One bathroom for four bedrooms is a design shortfall, not wear or an outside cause. Physical deterioration is the wrong choice, but nothing here is worn or damaged.
- A. Correct. A shortage of bathrooms compared with market expectations is a design or feature inadequacy. It is functional obsolescence.
- B. Incorrect. Nothing says an existing bathroom is worn or damaged. Physical deterioration would concern condition rather than this design shortfall.
- C. Incorrect. The inadequacy lies within the house's layout and features, not an influence outside the property.
- D. Incorrect. Regression concerns value influence from lower-priced surroundings. This stem identifies the home's own bathroom design shortfall.
Question 3A home's roof is worn out. Replacing it would cost $12,000 and would add $15,000 to the home's value. How should this be classified?
- A. Incurable physical deterioration
- B. Curable physical deterioration
- C. Curable functional obsolescence
- D. Incurable external obsolescence
Show answer and explanation →
Answer: B. Curable physical deterioration
A worn roof is physical deterioration because the loss comes from wear. It is curable because the $15,000 of value restored is more than the $12,000 cure cost. Calling it incurable is the error, but curability depends on comparing cost with value restored, not on how serious the wear looks.
- A. Incorrect. The wear is physical, but repair restores $15,000 in value at a $12,000 cost. Those figures support curability.
- B. Correct. The roof suffers physical wear, and the $15,000 restored value exceeds the $12,000 cure cost by $3,000. It is curable physical deterioration.
- C. Incorrect. The worn roof is a condition problem, not an inadequate design or feature. The correct category is physical deterioration.
- D. Incorrect. The roof is part of the property, and the proposed repair is economically justified. Neither external nor incurable fits.
Ready to move on?
You have this distinction down when all of these are true.
- Define every compared term without using the other term as the definition.
- Rebuild the comparison table from memory.
- State the decision rule and Georgia distinction without notes.
- Solve the worked example after changing one key fact.
- Explain the rule or fact that makes each distractor wrong.
- Answer all three original questions correctly in mixed practice on a later day.
Recommended next lesson
Continue with Progression Versus Regression. Next, progression versus regression looks at another outside influence on value: how neighboring homes pull a modest home up or hold an over-improved home down.
Return to the complete exam-concept library or the Valuation and Market Analysis hub.