Functional obsolescence

Understanding Functional Obsolescence in Real Estate

Functional obsolescence refers to the decrease in a property’s appeal and usefulness, not because of physical deterioration but due to its design or features becoming outdated. Functional obsolescence manifests in several types, ranging from curable to incurable.

Curable functional obsolescence can be corrected with cost-effective upgrades or modifications. Examples include outdated appliances or an old HVAC system, which a property owner can replace to enhance the home's value.

Incurable functional obsolescence stems from elements that are either too costly or impossible to change, such as property location or floor plan. For instance, a house located beside a busy road or a commercial real estate property with an awful architectural design might suffer from incurable functional obsolescence due to external factors beyond the property owner's control.

Market tastes and zoning regulations also play a significant role in influencing functional obsolescence. As market tastes evolve, design features once considered lavish and luxurious, such as a swimming pool in colder climates, may no longer appeal to the masses. Zoning changes can also render a property’s current use nonconforming, which will adversely affect the utility (and value) of the real property.

Identifying, Managing and Mitigating Functional Obsolescence

As mentioned previously, there are clear indicators of functional obsolescence that can be broken down into two categories. Curable functional obsolescence is where the cost of improvements is justified by the expected increase in the property's value. Examples include outdated kitchens or bathrooms that can be renovated, or adding modern, or even “smart”, technological features to an older home. These enhancements often augment the desirability and resale value of a structure.

If you’re a homeowner squaring off against curable challenges, you can take these steps to improve your lot (pardon the pun).

• Address outdated design features
• Transform cramped floor plan
• Prioritize renovations and upgrade fixtures

Incurable functional obsolescence stems from factors beyond a property owner's control. Properties located next to a busy road, under changed flight paths, or within areas subject to restrictive zoning regulations are examples of such. These conditions can severely limit a property’s appeal and value in the current market, regardless of its physical condition.

Additionally, external factors like economic obsolescence, which occurs due to changes in the surrounding area affecting the property's value (e.g., new commercial real estate developments impacting residential desirability), play a role in identifying functional obsolescence.

Mitigating incurable functional obsolescence demands a more nuanced approach. When external factors, like an undesirable location or economic obsolescence, diminish a property's appeal, you should concentrate on maximizing its existing strengths. For instance, improving interior aesthetics or adding modern amenities may offset disadvantages, elevating the property's appeal to potential buyers or tenants. Take time to assess external obsolescence and physical deterioration against potential uplifts from curable upgrades. Recognizing the balance between cost and impact ensures that your efforts to revitalize real property align with realistic goals for resale value appreciation.

One possible way to combat functional obsolescence is the potential conversion of a property. Changing use could help you maximize value profitably. Just remember to do your own research.