Obsolescence is a state in which a given object, practice, or service is no longer wanted anymore. The item may still be in great working condition, but the availability of a better or more convenient replacement item with more advantages makes the older item become considered obsolete. The term is applicable in many sectors, both in service and real property.
In real estate, functional obsolescence can be defined as the decrease in the desirability and functionality of a specific property because it is outdated in design. This is correctly applicable when the outdated design of the property cannot be changed to suit the current demand or meet the standards set by its replacements. The house doesn’t necessarily have to be in deplorable conditions for it to be considered functionally obsolete; the mere fact that there are newly created better options within the same locality can make it obsolete. This means that people will be no longer drawn to it as they are to the other homes around it.
Common Examples of Functional Obsolescence
Imagine a neighborhood where there are a lot of older homes, and imagine that they were all built when it was standard just to build small two bedroom houses with one bathroom. Then, imagine that 40 years later, investors notice a trend that people want larger homes and they start buying up old vacant lots in the area and start building modern five bedroom houses with three bathrooms. This availability of more modern and desirable homes can essentially render all the other older homes in the neighborhood to become considered functionally obsolete.
This does not mean that the old home cannot be used; rather it implies that it no longer has all the current features and facilities that modern buyers are looking for. It is therefore considered old fashioned and no longer desirable, even if the home is in perfect condition for living.
With the current inventions of new slim flat-screen TV sets, our old home entertainment centers have become functionally obsolete. This is because everyone is drawn to modern entertainment centers that are well built to accommodate the current slim TV models. The fact that we have replacements for them which are considered desirable and efficient makes these old features functionally obsolete. The old home entertainment points are said to be too deep for the modern flat screened TVs and, therefore, can no longer perform the main functions for which they were made.
Another example of functional obsolescence is when the real property is no longer valuable to the owner. This could mean that the operating costs for this property are exceeding the income it is generating. Then no buyer would be interested in such property. It would end up being functionally obsolete.
Functional obsolescence is an aspect of real estate that is important for consideration. This is because if one needs to sell or buy a house, putting functional obsolescence into consideration will ensure correct valuation of the property. It is wise even for a business investor to consider functional obsolescence when purchasing a business. The level of obsolescence will play a significant role in determining the purchase price of the business property. It is, therefore, critical to consider weighing out the extent functional obsolescence when acquiring new property.