What is “functional obsolescence” in real estate?

On Behalf of | Jan 26, 2024 | Residential Real Estate

Whether you’re in the market for residential or commercial property, you likely want to purchase one that will increase in value over the years. That’s why you’ll want to beware of any property-related concerns associated with functional obsolescence.

Most people associate functional obsolescence with tech products like phones, computers and other gadgets where something else is likely to come along in a few years or so that will make it obsolete. How many people do you see today with iPods or those bound organizers that everyone used to carry with them? While this concept makes sense in the realm of relatively cost-effective personal items, it must be very carefully considered when it comes to real estate transactions.

Types of functional obsolescence

In real estate, functional obsolescence is “the impairment of functional capacity of a property according to market tastes and standards.” That’s typically a deficiency that lowers (or will lower) the property’s value.

Some of these deficiencies are considered examples of “external obsolescence.” That’s something generally outside the property that an owner can do little or nothing to remedy – like an airport with a flight path directly over it or a planned expansion of a nearby highway. These often lead to a downward spiral of property values in a neighborhood and difficulty for sellers who want to relocate.

The noise from a nearby school may be considered an example of “incurable obsolescence,” because you can’t move the school and kids will be kids. If the next door neighbors are always throwing loud, drunken parties, you may be able to get that toned down – but only if you’re willing to take the necessary steps to do so, and there’s no guarantee of the outcome of your efforts.

A problem in or on the property itself is usually considered a “curable” obsolescence. For example, maybe a decades-old home has never been upgraded with new flooring or fixtures. These problems can be “cured” by the seller before they put the property on the market. They may prefer to sell the property “as-is” and let the buyer do the upgrades based on their taste and preferences.

Full transparency is key

Any kind of functional obsolescence can lower a property’s value and should lower the asking price. That’s why, whenever you’re buying real estate, you need full transparency of all of these things so you know whether the asking price is fair and where you have room to negotiate. This is just one of the reasons why having sound legal guidance in addition to real estate guidance is crucial. Sound assistance can help you make a purchase at a fair price that you aren’t likely to regret.