Functional and Economic Obsolescence

Functional and Economic Obsolescence
Though many pieces of real estate are very similar, no two are the same. One home will almost always have idiosyncrasies that separate it from other properties, regardless of whether two properties share the same floor plan or design.
Differences in age, condition, location, and utility can yield different results, and often produce different home values as well.

Functional Obsolescence
When properties are built, they don’t always adhere to the standards of a given neighborhood, floor plan, or site design. When this happens, depreciation is caused by a loss of building utility, otherwise known as functional obsolescence. In other words, if a building has reduced usefulness due to poor design, the value must be reduced.
Examples include buildings that are too big or lavish within a certain area which is considered an overimprovement, or a property that is relatively small or poor compared those around it, which is considered an underimprovement. If a building is said to be out-of-place or poorly designed for its location, it could be considered functionally obsolete.
If a property lacks a feature such as sideyard, or only contains one bathroom despite having five bedrooms, functional obsolescence occurs. It can however be curable or incurable, depending on the situation. If it is possible to tear out a wall or add a room, assuming cost is less than the value benefit, it’s considered curable. Incurable obsolescence is typically defined as overimprovements that will suffer value loss whether intact or removed.

Economic Obsolescence
Also referred to as external, location, or environmental obsolescence, this type of depreciation occurs outside the subject property. Typically this type of obsolescence occurs sometime after the property is built, as the environment around the home changes.
Examples include airport noise, toxic waste, nuclear power plants, freeway noise, dust and air pollens, changes in zoning, and more. For this reason properties located next to the freeway or under the flight path will experience reductions in value. Some even say that economic obsolescence occurs when market demand changes. Consider a home with only one bathroom. If all the new properties in the area are being built with 2 or more bathrooms, obsolescence can occur.
Most economic obsolescence is incurable, mainly because it is out of the control of the owner of the subject property, and any effort to cure such a problem would be very costly and value depleting.

Rob Alley, Realtor at Keller Williams Charlottesville
540-250-3275 (cell)
roballeyrealtor@gmail.com
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