For the real estate exam, you need to be familiar with deprecation and the three types of it. Today we talk about physical deterioration, the most common form of depreciation, the different kinds of physical deterioration, and more.
What is Physical Deterioration?
Physical deterioration is the loss of a property’s value as it ages, wears, tears, or decays. Physical deterioration is one of three forms of depreciation.
While it is a form of depreciation like functional and economic obsolescence, it is NOT a form of Obsolescence. Functional obsolescence Refers to the loss of property value due to an obsolete design feature. Economic Obsolescence refers to the loss of property value due to external factors.
Physical deterioration is just the regular wear and tear a building experiences over time.
What is Deprecation?
Depreciation is any loss in the value of a property over time from any cause.
An example of deprecation is if you get your house appraised at $100,000 and five years later it appraised at $90,000. That means your house depreciated $10,000.
What is Physical Deterioration Caused By?
As much as we don’t like to think about it, buildings do not last forever. Mother Nature loves to destroy and wear things out. Our homes, houses, and properties go through a lot; rain, flooding, snow, wind, earthquakes, hurricanes, tornadoes, and more cause physical deterioration.
What Is an Example of Physical Deterioration?
One of the best examples of physical deterioration is roofing and shingle replacement. After a while, a roof usually needs a shingle replacement or needs to be replaced completely. Most roofs only last a certain amount of time; during that time of wear and tear, physical deterioration occurs.
What Are the Two Types of Physical Deterioration?
Now it’s worth mentioning there are two categories of physical deterioration: curable and incurable. And those are just like they sound; one is easier to deal with than the other.
Curable deterioration: Refers to the form of deterioration that’s economically possible to repair.
For example, maybe there’s some old paint that’s deteriorated, and dealing with that would eliminate the problem. It’s curable, it’s fixable, and it’s economically feasible.
Here is a list of examples of curable deterioration and their respective fixes:
- Repairing any heating, cooling systems, or air conditioning issues
- Updating specific construction materials
- Dealing with roof restorations
- Dealing with chipped paint
- Fixing faulty wiring
- Fixing loose tiles
Incurable deterioration is incurable, meaning the cost of repairing an item surpasses the value it adds to the structure; the item is considered incurable even if you can fix it.
An example of that would be the foundation of a property that is faulty. There is no way of handling that without completely altering the property.
Here is a list of examples of incurable deterioration:
- Smoke damage
- Broken foundation
- Damaged sewer lines
- Severe termite damage
Short Lived Physical Deterioration
A third type of deterioration exists, but it’s not generally accepted everywhere. Some appraisers use the phrase to describe items that wear out faster than the improvements themselves.
Suppose that the original ac unit on a property is old and not the most energy-efficient; however, while it’s not the most energy-efficient, it’s still completely functional. It might not be worth replacing the ac unit since the original unit still works perfectly fine, and you can get a few more years out of it. If that’s the case, it is called short-lived incurable physical deterioration because while right now there’s no reason to repair or replace it, eventually, there will be.
What to Know for the Real Estate Exam
For the real estate exam, you need to be familiar with deprecation and the three types of it. Today we talked about physical deterioration, which is the loss of a property’s value as it ages, wears, tears, or decays. There are two types of physical deterioration: curable and incurable. If you understand all that, you are good to go, and you’re one step closer to acing that real estate exam.