Whether you’re investing in residential or commercial real estate, you want that investment to become more valuable in the future – certainly not less. That’s why it’s crucial to look beyond what it has to offer now and determine, as much as possible, what the future will bring for this property.
That’s where functional obsolescence comes in. This is defined in real estate as “the impairment of functional capacity of a property according to market tastes and standards.” This “impairment” is likely to lower the property’s current and/or future value.
It’s crucial to be aware of any functional obsolescence so you can factor that into the price you’re willing to offer or maybe bypass this property completely. You don’t want to learn after you’ve signed the purchase agreement that you were unaware of something that should have been disclosed – or that some due diligence would have uncovered.
There are multiple types of functional obsolescence. Let’s look at a few.
External obsolescence
This is something outside the property itself that could bring down its value. Planned extensive highway work, a new airport with a flight path over the property, a new prison or a change in zoning are all examples of external obsolescence that could drastically lower property values (and thus, rent) in the area.
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 the neighborhood and difficulty for sellers who want to relocate.
Incurable vs. curable obsolescence
These both involve the property itself. As the names indicate, some types can be fixed (for example, with upgrades and remodeling). Others can’t. For example, a commercial property may have a highly outdated architectural style that can’t be changed (without razing it and rebuilding).
If you’re in the market for a residential or commercial property, understanding the role of functional obsolescence is crucial to choosing a worthwhile investment and paying a fair price. This is just one reason why having sound professional guidance is key.
