Functional obsolescence

Functional obsolescence - a form of obsolescence of property that results "when layout, design, or other features are undesirable in comparison with features designed for the same functions in newer property." It is also defined as "outmoded design in older structures or unacceptable design in newer structures." Functional obsolescence may be caused by deficiency, the presence of a feature that ought to be modernized or replaced, or the look of a feature that is superfluous for the intended purpose. Functional obsolescence is caused especially by technological change leading to modernize occupier demand requirements for individual properties. The other forms of obsolescence arose from changing aesthetic/ visual norms, legislation and accepted standards of the quality of the working life, and environmental factors.

Types of functional obsolescence

There are two categories of functional obsolescence (curable or incurable) relating to economic feasibility:

• An older house that has four bedrooms, but just a one single bathroom located off the kitchen suffers from functional obsolescence. This is an example of incurable functional obsolescence, because the cost of constructing brand new bathroom may probably exceed any increase in value to the house.
• A newer home that is built with only two bedrooms, one room that is designed to be home office, would suffer from curable functional obsolescence. In most cases, three bedrooms are the minimum. Adding a closet to the home office space and changing it into bedroom would be easy. So the value of the home increases by an amount greater than what you have spent on building the closet.

Calculating functional obsolescence

Calculating functional obsolescence can be done in a number of ways. One method is to examine the cost to cure the functional deficiency. The cost-to-cure method is the most popular one in measuring obsolescence resulting from capacity deficiencies. "The second method is to calculate excess operating costs attributable to the subject asset over its remaining life".

Functional obsolescence should be taken into account when buying real estate or other objects. Outdated products can be bought cheaper, but it will be harder to sell them in the future. It is not a problem if someone buys for own purposes and doesn't plan to sell for a long time.

In case of real estate also other problem arises. If the property was bought using loan the decreasing value of the property can reach value lower than value of loan. Then the mortgage is not enough to cover the loan and financial institution can ask for another guarantee.

Examples of Functional obsolescence

• Outdated electrical wiring: Electrical wiring that is not up to current building codes or uses materials that are no longer safe to use.
• Poorly designed floor plans: Floor plans that are inefficient and lack modern conveniences, such as an open kitchen or a master suite.
• Outdated heating and cooling systems: HVAC systems that are inefficient and costly to maintain, or that utilize outdated technologies such as window air conditioning units.
• Inadequate insulation: Insulation that does not meet current standards, leading to higher energy costs.
• Lack of modern amenities: Properties that do not have features such as a home office or a media room.
• Old appliances: Appliances that are outdated and/or inefficient, such as an electric stove rather than a gas stove.

Advantages of Functional obsolescence

Functional obsolescence can be a useful tool for improving property. Here are some of the advantages of functional obsolescence:

• It encourages the use of newer, more efficient designs and layout, which can improve the overall quality of a property.
• It can also help to reduce maintenance costs, as newer designs are often more efficient and require less maintenance.
• It can also increase the value of a property, as newer designs are often more desirable and can increase its attractiveness to potential buyers.
• It can also be used to reduce the risk of potential hazards, such as fire or malfunctioning equipment, as newer designs are often designed with safety in mind.
• Functional obsolescence can also be used to keep up with changing trends and demands, as newer designs may be better suited to current needs.

Limitations of Functional obsolescence

Functional obsolescence is a form of obsolescence of property that results from the comparison of features of newer property to those of older property. This type of obsolescence can lead to certain limitations, including:

• Inability to meet modern standards - Older property may not meet modern standards. For example, an older building may not have the necessary safety features, such as fire alarms and emergency exits, required by modern building codes.
• Difficulty in updating - Older property may not be able to be easily updated, as it may be more expensive or require more effort to upgrade to meet modern standards. This can be especially true of older buildings, which may not have the capacity to be updated with modern building materials or technology.
• Reduced efficiency - Older property may also be less efficient than newer property, leading to higher energy costs. This can be especially true of older building materials or appliances, which may not be as energy efficient as newer materials and appliances.
• Outdated layout and design - Older property may have outdated layouts and designs that are not conducive to modern living. This can be especially true of older buildings, which may have smaller rooms and hallways or a lack of modern amenities, such as an open floor plan.

Other approaches related to Functional obsolescence

Functional obsolescence is when the layout, design, or other features of a property are undesirable in comparison with features designed for the same functions in newer property. Other approaches related to functional obsolescence include:

• Physical obsolescence: This is when the property loses its value due to the physical deterioration of its original structure or components.
• Economic obsolescence: This is when the property value is reduced due to changing economic conditions or a decrease in the demand for its use.
• Technological obsolescence: This is when a property is no longer able to meet the demands of current technology, or when the technology has become outdated.
• Legal obsolescence: This is when a property can no longer meet the requirements of the applicable laws or regulations.

In summary, functional obsolescence is when the layout, design, or other features of a property are undesirable in comparison with features designed for the same functions in newer property. Other approaches related to functional obsolescence include physical obsolescence, economic obsolescence, technological obsolescence, and legal obsolescence.

Footnotes

Functional obsolescence — recommended articles

Fair wear and tear — Economic obsolescence — Capital resource — External obsolescence — Non recurring cost — Visual inspection — Weep hole — Biological assets — Clean fuel

References

• Dunse, N., & Jones, C. (2005). Rental depreciation, obsolescence and location: the case of industrial properties. Journal of Property Research, 22(2-3), 205-223.
• Miles, M., Cole, R., & Guilkey, D. (1990). A different look at commercial real estate returns. Real Estate Economics, 18(4), 403-430.
• Thomsen, A., & Van der Flier, K. (2011). Understanding obsolescence: a conceptual model for buildings. Building Research & Information, 39(4), 352-362.

Author: Filip Fikas