The majority of investors have heard they must stay clear of functional obsolescence in order to reap a profit the investments they make. Yet, very few people contemplate what “functional obsolescence” really means and how they can prevent it. With this in mind, here’s an explanation of this term in the real estate world. Learn what functional obsolescence means and how it could adversely affect your investment.
What’s functional obsolescence? real estate?
According to the Dictionary of Real Estate Appraisal 5th Edition The word “functional obsolescence” is defined as “the impairment of functional capacity of a property according to market tastes and standards.” In simple terms, this definition basically means that there is a decrease in the appeal of the property usually due to an outdated feature that is unable to easily be changed or altered.
It’s important to understand that functional obsolescence can be used across a variety of industries and is not limited in the property market. For instance in the field of technology functional obsolescence is frequently mentioned in connection with smartphones. Since the manufacturers of smartphones are constantly making new and improved versions of their smartphones, these devices become functionally obsolete very quickly. Simply put when a new version of a specific smartphone is made available to the market, all the previous models become functionally obsolete.
Many businesses take functional obsolescence into consideration when they do their long-term planning for business. If you’re an investor, it is important to take the same approach as it’ll affect the value of the property. It’s true that a property that is considered to be functionally outdated will not be able to earn the same rental as the other properties in the area. In the same way when you’re using an approach of fix-and-flip that is not functionally outdated, the property is more difficult to, if not impossible to remodel to the same standard like the homes around it.
What are some typical examples in the field of functional obsolescence?
One of the most effective methods to comprehend functional obsolescence is to look at some examples. Here are some of the most frequent elements that can lead to an asset being deemed functionally obsolete in the real estate market. Keep these things in mind when you seek out properties to add to your portfolio , and try to stay clear of them.
Roads are busy
In general, houses that are located near streets that are busy are thought to be less desirable. On the other side, traffic patterns can create difficulties for drivers to get into and out of driveways frequently and also make it dangerous playgrounds for kids to enjoy in the space. However it is true that the continuous sounds of traffic could result in noise pollution.
Bedrooms with mismatched numbers and bathrooms
Homes that are not matched in number of bathrooms and bedrooms in terms of square footage could be considered to be functionally obsolete. Imagine an apartment that’s 990 square feet, yet is home to three bedrooms. These bedrooms would be tiny that they’d be deemed functionally outdated.
It’s the same of a five-bedroom home that has only one bathroom. In such a scenario it is likely that there are plenty of residents living in the house just to have one bathroom, which would not be a good idea. If you look at this type of property, buyers will look for a house that matches their requirements.
If physical wear and tear from deferred maintenance can be corrected but it’s also thought of as an example of functional obsolescence. This is especially true when the homes of the area are maintained well. If there are better alternatives available, evidence of neglect will reduce the appeal of the home overall.
What are the various types of obsolescence that are functional?
In all there are three distinct kinds of obsolescent function. Below, we’ve listed them and discussed the differences between them. Take a look to determine what type you’re dealing when you consider the possibility of investing.
Obsolescence that is curable
The name implies that curable functional obsolescence is a reference to any defect that can be remedied by the owner of the property. For instance when physical depreciation is able to be fixed by fixing and renovating the property in question and the property is in good condition, then it could be considered to be curable.