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What is Functional Obsolescence?
Looking for a new house is not a simple task. There are numerous factors to take into account. Some of these include the location of the house, the distance between your potential new home and your workplace, the time it will take for your kids to get to school, and so on. You will also have to consider the neighborhood and how long you see yourself living there.
The financial questions are significant, too. You might have to calculate if a fixed-rate mortgage is better than one with an adjustable rate, the amount you will have to shell out apart from buying the home, and many more. In addition to the practical questions, you will also come across terms that don’t sound too familiar. One of these terms is that of functional obsolescence.
In order to make sure you fully understand what functional obsolescence means, you need to have a realtor who can walk you through the whole process. Hence, going for a reputed name becomes extremely essential. Local realtor and real estate marketing expert, Pizzi Properties, for example, provides you with competent real estate services. Anyone looking to buy a new place in the areas of Jersey Shore and South Florida can look them up.
What Does Functional Obsolescence Mean?
Functional obsolescence can mean different things depending upon the industry. As far as real estate is concerned, it refers to the value of a property decreasing due to factors such as space, style, or design. If a house is functionally obsolete, it means it has either too little or too much of something in comparison to the other houses in the market or the area.
If a house has two bedrooms and one bathroom in an area filled with larger homes comprising of three bedrooms and two bathrooms, it would be considered functionally obsolete. It's because although the house isn't bad individually, the ones surrounding it have better features and more to offer. When a piece of real estate is functionally obsolete in this sense, it's called 'deficiency'.
The opposite of this situation qualifies for functional obsolescence, too. For example, if there's a large, new house in a neighborhood dominated by small and old houses, it would be considered functionally obsolete. The higher quality of the house in comparison to the rest of the nearby houses is what causes it to be labeled as functionally obsolete. People wouldn't want to pay a higher amount for this due to the lower properly value of the neighborhood, and this is known as 'super-adequacy.'
Apart from the home and its location, the individual features and design of a home can make it functionally obsolete as well. If a homeowner, for instance, paints certain parts of the house an unappealing color, it could make the buyers cringe over such details. The unpopular elements in the design of a given house also contribute to functional obsolescence.
If you want to make sure that such functional obsolescence is dealt with in a proper manner, you will require a local advisor who knows the market well. A well-known name such as Pizzi Properties helps tremendously in this regard. Not only are they aware of all the neighborhoods, but their useful insights will aid you in your decision-making process. The negotiator will guide you from the beginning to the end, and their positive record is just another reason to trust their expertise. After all, Daniel Pizzi, the creator of Pizzi Properties, says his mantra is, “Real Estate sells itself; I sell Service.”
Is Functional Obsolescence Curable?
Functional obsolescence can be curable or incurable. There are certain situations that make a type of functional obsolescence curable. For example, if there are certain fixtures that are lacking but can be remedied by buying those fixtures, that makes a functionally obsolete house curable. Similarly, if there’s a fixture that isn’t important to the property anymore, that’s an example of curable functional obsolescence as well. Replacing a missing fixture with another one can be counted as curable functional obsolescence, too.
Different Types of Obsolescence in Real Estate
In real estate, there are various categories of obsolescence that exist. These can further be categorized into external obsolescence and internal obsolescence, and also curable and incurable obsolescence. The different types of obsolescence in real estate are as follows:
· Technological Obsolescence
Technological obsolescence takes place when an asset or its components are not replaceable anymore due to the changes in technology. It happens when the replacements parts aren’t available anymore or even when the technological life of an asset has expired. If a modernization project needs to be implemented, resulting in a capital project, that's when it's technological obsolescence.
The manufacturers of products bringing about new changes in relation to technology is the first step that causes technological obsolescence. Certain assets are more prone to technological obsolescence, such as fire alarm systems, elevators, and HVAC controls. Electrical systems can be a part of it, too, including the CCTV systems used for security along with the equipment for access control.
A classic example of technological obsolescence is that of a fire alarm panel. If certain parts of a fire alarm panel get damaged, they can be replaced within a few hours or days. However, functional failure can take place if the replacement parts aren’t arranged within a specific period of time.
· Legal Obsolescence
Legal obsolescence occurs when orders are issued by an authority having jurisdiction, which in turn leads to certain assets being prohibited for further use. The prohibition lasts until specific changes are introduced. In the case of a legal obsolescence, the owners receive a deadline, and a few remedies are prescribed as well. The challenger asset is what acts as an upgrade to the defender asset. An incremental cost is associated with the challenger asset, which then factors itself in to the replacement planning session.
A governing authority dictating consumer protection often forms the cause of a legal obsolescence. Apart from that, it happens when a systematic defect in an item leads to product recall. Some of the assets that could be susceptible to legal obsolescence include bounded assets, assets that have safety implications, and assets that come with statutory maintenance requirements.
· Aesthetic/Style Obsolescence
If an asset or a product has gone out of style, thereby making it no longer desirable to the owners, that’s known as aesthetic or style obsolescence. It basically deals with the aesthetics of a product and not its function or performance. Items related to interior decoration, for example, could become outdated after a while.
Style obsolescence also refers to an asset being replaced in order to keep up with the trending fashion. Subjectivity and personal taste play a huge role in determining what is obsolete in terms of style and aesthetics. Some of the items that can be susceptible to this category of obsolescence include wall coverings, floor finishes, window coverings, and artwork and furnishings in general.
· Economic Obsolescence
When the objectives or functionality of an object or asset can be replaced due to the presence of a more cost-efficient option, that’s when economic obsolescence comes in. If an asset is beyond economic repair or has lived beyond its economic duration, it becomes economically obsolete.
Some of the assets that fall under this type of obsolescence include assets consuming energy, assets using a type of fuel, and also assets with a decent payback cycle. A high utilization index or being a component of a production incentive program is an example of economic obsolescence as well. Assets that assist in conserving energy, provide environmental separation, and those that aren’t durable enough also make for economically obsolete assets.