Functional obsolescence refers to a decline in desirability or value of an item because of its decreasing utility, often due to being replaced by a more functional item. Advancing technology is a great example of functional obsolescence in action: as cell phones have become the norm, the use of landline phones has decreased to the point that many people simply don’t have a home phone anymore. They are functionally obsolete.
What does Functional Obsolescence Mean in Real Estate?
In real estate, functional obsolescence means that changing market tastes or standards impact the value of a home. For example, if it becomes standard in a neighbourhood for a home to include three bedrooms, but your home only has two, your home will decline in value because it is functionally obsolete compared to the other homes in your area.
A shed or a barn can be subject to this as well. If it’s now standard to have a shed or barn at a certain size, any structure that is smaller than this standard will suffer from functional obsolescence.
Types of Functional Obsolescence in Real Estate
Incurable Functional Obsolescence
This type occurs when the cost to repair a feature is greater than its value or the benefit that the upgrade would provide. For instance, if a shed on the property is too small and considered functionally obsolete, it might be possible to remodel it, but the cost of remodeling would be more than simply building a new shed, that is incurable functional obsolescence.
Curable Functional Obsolescence
This refers to the opposite situation from the above. For example, if adding an extra bathroom to a home will increase its value more than it will cost to construct it, this functional obsolescence is curable.
This happens when a homeowner over-improves their home to the point that it actually decreases its market value. For example, if you add an indoor pool to your home but it ends up being too expensive for most buyers to maintain, that is superadequacy.
How Does Functional Obsolescence Impact Property Value?
When your property is appraised, a deficiency—meaning that a feature doesn’t meet the market standard in some way—will cause the market value to decrease. How much it will decrease will be affected by whether the functional obsolescence is curable or not. If it’s incurable, the value will decline further.
Use the Douglas Cost Guide to Determine Accurate Estimates for Replacement Costs
When determining the potential impact of functional obsolescence on your home’s value, it’s essential to understand whether it’s curable or incurable, and then to know the cost of curing it via renovations versus simply replacing the feature entirely. Calculations of this kind are incredibly complex and difficult to estimate, which is why the Douglas Residential Cost Guide takes the guesswork out of the equation and returns results you can rely on to budget accordingly. Use this user-friendly guide to secure an accurate estimate for replacement costs.