Obsolescence
Definition and meaning of Obsolescence in real estate.
Obsolescence is a reduction in a property value caused by changes in design, functionality, or external factors that make the property less desirable to buyers. It is generally categorized as functional, physical, or economic, depending on the source of the decline.
In more detail
Functional obsolescence occurs when a property layout or features are outdated, such as a home with four bedrooms but only one bathroom. Economic or external obsolescence is caused by factors outside the property boundaries, such as increased traffic, new zoning laws, or proximity to a landfill.
While functional and physical issues can sometimes be cured through remodeling, economic obsolescence is almost always incurable. Real estate appraisers evaluate all forms of obsolescence when determining the fair market value of a property.
Key facts
| Category | Real Estate Investing |
|---|---|
| Types | Functional, physical, and economic |
| Watch out for | External factors are usually incurable |
| Impact | Lowers property appraisal value and buyer demand |
An investor buys a house with a layout that requires walking through one bedroom to reach another, which represents functional obsolescence that lowers the home market value.
Frequently asked questions
Can obsolescence be fixed or cured?
Functional and physical obsolescence can often be cured if the cost of remodeling is less than the resulting increase in property value, but economic obsolescence cannot be cured because the cause is off-site.
How does external obsolescence affect property values?
External obsolescence reduces a home value due to outside factors like airport noise or a nearby commercial development, which are completely beyond the property owner control.