The word obsolescence derives from the word obsolete, which refers to something being outdated or irrelevant in use. In terms of real estate, functional obsolescence refers to a property’s usefulness as being reduced. The property’s usefulness may be reduced as a result of an outdated design style and may no longer meet the standard of the community in which the property resides.
Oftentimes this may happen as a long-time property owner makes no updates to his or her property, thus the function of the property becomes obsolete. When sold, it is common for properties that fall under this category to be remodeled or renovated to meet the new standards set forth by most properties in the neighborhood.
When the function falls out of line with typical community standards, the property’s depreciation may result from functional obsolescence. A gas station is an example of functional obsolescence. Per California law, any buyer of an old gas station who wishes to convert the property to another business, or redesign it for another purpose, must remove all underground tanks and wait a period of between one to two years for the city to allow the buyer to open a new business. For this reason, the final sale price of the gas station will be reduced dramatically to compensate for the fact that the new owner must pay for removal of old gas tanks, in addition to waiting for the city’s approval of the new project.
Example:
An example of functional obsolescence is a neighborhood in 2016 that has seen a new wave of several miniature properties being demolished and replaced with newly constructed massive sized homes. While all this is taking place there is still one home dating back to 1915 which was the only house in the area left untouched/renovated. Not only is this property old and outdated in terms of appearance/architecture, it’s not nearly half the size of the homes being built in the surroundings of this one specific property. Such trends can lead to a devaluation of the home left indifferent vs the rest.
Overview:
Renovating/construction is never ending in the world of real estate, especially here in the United States. Constant construction and changes to existing properties can be sudden and enough to where property values can very well be altered as a result. Real estate consumers/buyers/agents/brokers have certain level of expectations in respect to a property. In the case of functional obsolescence, at the bear minimum properties in an area are expected to appear somewhat uniform in respect to overall presentation to avoid being categorized as functionally obsolescence.
