If you stumbled up on this page, chances are you are studying for some sort of real estate exam and looking to improve your real estate vocabulary. Let me introduce you to the wonderful world of functional obsolescence.
Functional obsolescence in real estate may hinder anyone who wants a new home for the long term. But what exactly is functional obsolescence?
We will tell you everything you need to know about functional obsolescence and how it affects your buying decisions when purchasing your own house.
What Is the Exact Definition of Functional Obsolescence?
The definition of the term varies depending on the industry and the companies using the term.
Generally speaking, it is the reduction of an object’s desirability and usefulness because of features that are now considered outdated.
One example is the continuing decline into functional obsolescence of the physical book due to the emergence of advanced data and digital books.
As a result, companies begin gaining traction and widespread use of such materials.
Another good example is how smartphones become functionally obsolete whenever companies introduce a newer model to the market.
Because of the business planning of a smartphone company and the smartphone industry in general, a new phone debuts on stores every year.
With market tastes and competition, the older products easily and quickly fall into functional obsolescence.
How Does It Affect Real Estate?
In terms of the real estate market, functional obsolescence means that a certain property’s desirability or demand has decreased based on the data.
One reason for this is because a design feature or a group of design features has become obsolete. It also does not help that replacement costs are too great, thus leaving the features unchanged.
Functional obsolescence affects a property’s value.
For instance: properties that are deemed functionally obsolete (home, building, etc.) will not garner the same amount of rent as similar properties in the vicinity.
Even if the problems are renovated, this will still be the case due to accounting methods that keep the value of the property as similar to those around it only after renovation.
As a result, expect a loss to occur because the cost of said renovation is higher than the value of the property.
Examples of Functional Obsolescence in a Design Feature in Real Estate
Number of Bathrooms
There are many good examples in real estate of how flaws can impact a property’s value because of functional obsolescence.
For example: If a house only has one bathroom when other homes in the neighborhood have three, that house can be considered functionally obsolete.
In this case, the number of bathrooms becomes an obsolete feature.
Bedroom and Bathroom Correlation
Another good example is the correlation between the number of bedrooms and bathrooms in a given home.
If there are multiple bedrooms in a residential home but only a single bathroom, that home can be considered functionally obsolete as well.
If a certain property has been left in a state of decay or has not had any proper renovation for quite some time, this could result in the property becoming functionally obsolete.
Therefore, the property value diminishes during the cost approach.
If a house has a swimming pool that is smaller in size compared to those found in the other homes in the neighborhood, this deficiency or decline in usefulness can contribute to the property becoming functionally obsolete.
Functional Obsolescence Appraisal Types
In the subject of real estate, there are three different types of functional obsolescence. Let’s go over each type:
Curable Functional Obsolescence
As the name implies, curable functional obsolescence in real estate is when the property owner can fix a particular outdated feature in a home, thus raising its quality and value.
One example of this is the color of the house. If the current color of the house is what is turning off potential buyers, a simple, new coat of paint can effectively fix the problem.
Incurable Functional Obsolescence
This is another type of functional obsolescence that is the opposite of Curable Functional Obsolescence.
It is when the factor causing the obsolescence or depreciation costs too much to be fixed or renovated or is an external factor that the owner of the property has no control over.
For example, a home located on a busy road will see its value depreciate because of the various negative factors that come with being located on a busy road, such as noise pollution and air pollution.
This is the last type of functional obsolescence. Superadequacy can be thought of as the opposite of deficiency in real estate. It’s when an investor or group of investors renovate the area they are selling.
One example of this is when an investor or group of investors renovate a home to have 5 bathrooms to address a lack when most of the houses in a neighborhood only have 3 bathrooms.
How Functional Obsolescence Factors Impacts Property Value
Functional Obsolescence becomes an issue when it comes to the appraisal of a certain site.
Incidence of incurable functional obsolescence will lower the value and demand of the property for consumers even if extensive refurbishments are made.
Even if carried out successfully, the refurbishments will still result in a lost investment for the homeowner.
This is because the amount needed to refurbish a particular home will be greater than the amount the home will cost after the refurbishment.
On the other hand, a case of curable functional obsolescence will have no impact on the value of a property as long as… – get ready for it – the people overseeing the property can find a way to remove the factor that is causing the functional obsolescence effectively.
With the outdated factor out of the way, the property value rises and becomes similar to its properties.
Superadequacy will also incur a loss on the homeowners’ end because they will not recoup their long-term investment due to the high replacement cost of the investments they made.
The amount they will lose will depend entirely on how the property costs correlate to the amount of money spent on the investments.
Functional obsolescence is a real problem in real estate that you must educate yourself on, especially if you plan on buying or selling a new house.
Depending on the kind of functional obsolescence present, this can spell the difference between a profit or a loss to the homeowner, which is why it is important to get your property properly appraised.