Functional obsolescence is when an older product or service has been replaced with a newer model that offers more features. External obsolescence, on the other hand, is when consumers stop buying products because they become outdated.
When it comes to real estate, obsolescence means the loss of value (or depreciation) over time resulting from external or functional factors. The most common reasons for real estate obsolescence are an outdated design, poor site location, and inferior construction materials.
Types of Obsolescence
Obsolescence can be in two forms: External Obsolescence and Functional Obsolescence.
1. Functional Obsolescence
This occurs when an older product or service has been replaced with newer models that offer more features. This type of obsolescence can be temporary (ephemeral) or permanent (structural). The former refers to the condition where demand for certain goods will diminish over time, but these goods are still superior alternatives available on the market, while structural obsolescence means there’s no longer any demand at all for obsolete products/services because consumers now favor new ones.
Examples of function obsolescence can be seen in the automobile industry, where cars are constantly being upgraded with better features. This is done to keep up with consumer expectations and to attract new buyers.
Examples of external obsolescence can be seen in the music industry, where an older song may become obsolete in the eyes of consumers when a new, more popular song is released.
2. External Obsolescence
In real estate, external obsolescence is the loss of value (or depreciation) over time resulting from external or functional factors. The most common reasons for real estate obsolescence are:
- A change in fashion and style – A house that was once state-of-the-art and popular might now be considered outdated.
- Poor site location – An ideal house on the best block might be worth less than a dump on the main street.
- Inferior construction materials – A house that is poorly built, using poor quality and/or outdated materials, will have a lower value.
- Changes in technology – A house that is not wired for the internet will become obsolete as more and more services move online.
- Expensive repairs – Some houses need more repairs than others. If the cost of maintaining a property is higher, then its value will be lower due to the “cost” factor.
- Supply exceeding demand – In real estate, this is when demand for a certain house has dropped, causing its value to drop. You have to get an appraisal done by a professional to know the real value of your home.
Subsections of Functional Obsolescence
Functional obsolescence is subdivided into two, curable and incurable.
Curable is when the consumption of goods is not dependent on the product itself. For instance, a car owner can buy new cars as old ones become obsolete and still use them for their intended purposes.
Incurables are those that cannot be corrected by consumers, such as natural disasters or accidents. An earthquake might render an already old house unrepairable due to its precarious structure, among other things.
These types of functional obsolescence do not consider external factors but how it affects the product’s ability to perform its function. Both curable and incurable forms affect all products driven by materials science, including computers, microchips, and others alike, which experience wear out over time depending on usage levels and conditions. If this occurs, then they will need replacement before further damage takes place, like in the case of incurable functional obsolescence.
A third form is called ‘involuntary,’ which refers to shortcomings in design, but these issues can be corrected over time as these products mature on the market.
Functional Obsolescence vs. External Obsolescence
Function obsolescence is the decline in value of an item over time due to its lack of ability to perform its intended purpose.
Function obsolescence can be either temporary or permanent, and it’s driven by external factors. External obsolescence refers specifically to the loss of value due to external factors that affect both the functionality as well as desirability for a good/service.
This type of function obsolescence can also be divided into curable and incurable forms, which differ from those seen with function obsolescence.
Although similar, function obsolescence is not to be confused with external obsolescence. External factors such as fashion and style cause items like clothing and cars to become obsolete over time, whereas function obsolescence is caused by internal factors such as parts that wear out over time.
However, the two can be related when external factors affect a product’s ability to function properly, like in the case of an outdated computer which may need repair due to its lack of compatibility with newer programs or operating systems.
Another difference between these forms of obsolescence is how they are corrected:
Functional obsolescence – If consumers feel there isn’t enough value in buying new products, then manufacturers will stop making them and release something better. Once the demand for older items has disappeared entirely, it becomes a curable form of functional obsolescence.
External Obsolescence – This cannot be repaired but rather requires replacement once certain factors render it obsolete.
How can Real Estate Consumers Reduce Obsolescence?
If you are looking for real estate, it is best to keep an eye out on the market so that you can purchase at a good price. If possible, look into buying property with low levels of function obsolescence. Some ways include checking local listings or talking to agents who specialize in selling properties with this kind of problem.
Since external factors affect all housing markets, be sure to consider these things before making any final decisions regarding where and what type of house will suit your needs best.
When selling older homes, ensure that they don’t have high levels of either curable or incurable forms as this might reduce its value some more. People often buy used houses over new ones because they prefer how the former looks, even if their function is no longer relevant. If the house has any external obsolescence, then it can be easily fixed through renovation or refurbishment.
Both curable and incurable forms affect all products driven by materials science, including computers, microchips, and others alike, which experience wear out over time depending on usage levels and conditions. If this occurs, then they will need replacement before further damage takes place, like in the case of incurable functional obsolescence.
Comparative Market Analysis (CMA)
This is a recommended method of determining the value of any property, including those with function obsolescence. A CMA compares the state of a home to determine how much it should be worth, given its condition and other factors. One must always keep an eye open for external changes that may affect their property’s value, such as location, size, or even design aesthetics which might change over time due to external influences like fashion or style.
When you buy a new home, the purchase price usually reflects the cost to build it plus some profit margin for the builder/developer. Your initial equity is also based on that purchase price, but as soon as you move in, your home depreciates – or decreases in value due to wear and tear or changes in market conditions making it less desirable than other homes on the market.
So What’s the Difference?
So what’s the difference between the two? There are two main types of obsolescence: functional and external. The latter is more common as the former only concerns the product’s function rather than its design or any other aspects which might affect how it looks. While these forms can be considered a negative aspect, they also serve as an advantage for consumers who need something that fits their lifestyle, such as older homes with low levels of either form of obsolescence.