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Physical deterioration is the most obvious form of depreciation because, simply said, you can see it. When your maintenance does not keep up with natural wear and tear, you have physical deterioration. It is a loss of value from all causes of age and action of the elements. Mother Nature will eventually take her course on buildings and homes, and eventually wear them out. Keep in mind that physical deterioration is not a form of obsolescence.
Most forms of physical deterioration are curable. For example, suppose your house needs new paint costing about $6,500. There is a chance a prospective buyer may take down their offer price by $6,500 to cover the painting expenditures.
Curable physical deterioration examples include:
- Paint jobs
- Roof repairs
- Deferred maintenance
- Repairs to the heating or cooling system
- Faulty wiring
- Lose tiles
- Dated construction material
- Normal wear and tear
The list can go on.
If the bearing walls have to be replaced or if the foundation of a property is faulty, it would be considered incurable physical deterioration. In theory, everything is reparable-in theory, you can rebuild the entire house from scratch-but at some point it goes past reason.
There are appraisers who use an additional category called short-lived incurable physical deterioration. This category would include provisions for items that wear out faster than the improvements themselves. For example, suppose that the original furnace in a home is not as desirable as newer, more energy-efficient furnaces that are now available. Suppose, however, that the existing furnace is still functional. It might not be cost-effective to replace the furnace now, since this expenditure might not be fully realized in the value of the property. However, when the existing furnace is totally worn out and needs to be replaced, then it will make sense to put in the newer, more updated furnace. This is called short-lived incurable physical deterioration, because although it would not be economically feasible to repair it today, eventually it could become economically feasible.
Some appraisers include this short-lived physical deterioration as being curable, rather than incurable. They do this because they think that it will eventually be fixed. You can find decent people on both sides of this debate. Perhaps the most important thing is that the appraiser is consistent in this application. It is acceptable to consider this as either curable or incurable, as long as the same standard is applied to the subject property and the comparable properties.