What is “Functional Obsolescence” and How Does it Affect Me?

Have you ever heard the term “functional obsolescence?” Maybe you’ve seen it on an appraisal or heard it from an appraiser without an explanation of what it means. This is an appraisal/real estate jargon phrase, and the definition is: A reduction in the usefulness or desirability of an object because of an outdated design feature, usually one that cannot be easily changed. Although this is more common in older homes, it can happen to any home as a result of lack of maintenance. There are two general kinds of functional obsolescence:

  1. Incurable Functional Obsolescence
    Though the name suggests that this kind of obsolescence cannot go away, that is not always the case. Whether

    An extreme example of functional obsolescence!

    An extreme example of functional obsolescence!

    functional obsolescence is curable or not is determined by how much it costs to cure, and how much this increases value. One example of incurable could be a one car garage. In today’s market, a one car garage is functionally obsolete and homes are (almost) never built with less than a two car garage.  Say that it costs $10,000 to add another car onto the garage, but it will only increase sales price of your home by $5,000. Because you have lost on your investment, this would be incurable functional obsolescence. Does that mean, however, that you shouldn’t build another car on if you really want to? Of course not! It’s your house, and you live there. If you want to add something that might not return your investment, that is totally up to you. It’s always a good idea to be informed, though! Another example of functional obsolescence that can be impossible to even consider “curing” is layout issues. In some old houses, a bedroom can be positioned behind another bedroom, so that you have to walk through the other bedroom to enter or leave. This is functional obsolescence that, short of tearing down the bedroom, can be impossible to address.

  2. Curable Functional Obsolescence
    For somethingto be “curable,” the costmust be worth the investment. For example, an older home with 3

    functionally obsolete kitchen

    This kitchen, though everything may be in working condition, is functionally obsolete due to its lack of updates.

    bedrooms and 1 bathroom would be functionally obsolete in today’s market. 1 bathroom is simply not enough for the number of people who would live in a 3 bedroom, and it is undesirable for today’s buyers. Typically, homes with 2 bathrooms sell for much more than one bathroom, and it would probably be worth it to install a second bathroom.

Whether something is “curable” or “incurable” depends largely on the home and the market area. Some markets might react strongly to a new kitchen, while in others you might not see much of a difference. It’s important to remember that functional obsolescence does not necessarily reflect the livability or even condition of the home. A home might be kept in great condition, but if it is hopelessly out of style, it has functional obsolescence.

Have you ever seen or experienced functional obsolescence? Were you able to cure it?

Comments

  1. Thank you for sharing your knowledge on functional obsolescence. Always an important topic for appraisers in Sacramento and everywhere.

  2. Michael Brandlin says:

    This was very helpful, thank you! There are so many terms that appraisers use that can confuse a homeowner, thank you for explaining this one so clearly.

  3. Great post, Jeff. I like the way you broke down curable and incurable obsolescence into very easy to understand terms. Thanks.

  4. Great information Jeff! Functional obsolescence is often not completely understood. Thanks for the explanation, it may help some owners make the right decision when thinking about whether or not to change the layout of their own home. It can make a huge difference in value.

  5. Informative and well written. Nice work.
    -Mike Turner
    TurnersAppraisals.com

  6. Great explaination. I love the picture of the toilet in the kitchen. Couldn’t be more clear!

  7. Great information and a discussion I have with my clients when we look at homes. Though it is amazing to see what today’s buyers “must have” that generations before never considered as a problem.

    • Jeff Hamric says:

      Yes, it is amazing. I grew up in Southern California in a post WW2 3 Bed, 1 Bath home. There were 6 people and it was just normal. We were in a nice area too. It’s interesting to Google ‘average home size’ and look at how much it has gone up in the last 30 years. Thanks for the comment Cindy.

  8. In Chicago we sometimes see functional obsolescence with the lack of a garage due to the primary dwelling being located on the rear of the lot. Current zoning regulations do no allow for garages to be built on the front of the lot.

    • True John,

      That seems to be the case in older cities. I used to live about 2.5 hours South West of you in the Quad Cities and we had the same issues. Its amazing to see building trends changing right before our eyes.

      Thanks for the comment.

  9. Love the pic of the toilet in the kitchen. Seller probably loved it!

  10. I showed a home to a client a few years back in Lincoln that was built in the 40’s. This was a two story cottage the had two bedrooms upstairs. However the staircase was too narrow and steep. It was built this way due to the limited space of the first story. I would classify this as incurable functional obsolescence, am I right?

    • Jeff Hamric says:

      Great question Pete. You hit the nail on the head. It would end up costing possibly more to cure this issue than the home is worth. (I don’t know the house, but as you know, changing the angle on the staircase would be very expensive and possibly might not add any value to the property.) In Old Lincoln, this is not an isolated situation.

  11. Excellent explanation of functional obsolescence and curable versus non-curable conditions. Could be helpful in educating reluctant sellers.

  12. Great article Jeff, as always! I just encountered a Functional Inadequacy today, in that the pedestrian door from the subject’s attached garage leads to one of the bedrooms; which necessitates entering a private space to access the garage. I would consider it curable by sealing the door leading to the bedroom and replacing the linen closet with a doorway; or just adding a doorway leading to the front porch.

    Jason Fischman, ASA, IFA, AGA, RAA, HMS, GREEN
    Chief Valuation Officer
    Appraisal Evaluations, Inc.

    • Jeff Hamric says:

      Thanks Jason. Yes, I see them way more in older houses, especially houses where additions/modifications have been completed. I bet there are certain LA areas that fit that criteria. How often do you run into this?

      Jeff

  13. I see this only on occasion. Oddly enough, the subject is a tract-built home from 1976. I am assuming that the comparables in the tract; particularly model matches, would suffer from the same Functional Inadequacy. The worst case of Functional Obsolescence I can recall was a house in West L.A. that had a portion of the lower level converted to a second dwelling unit, a second level with two tandem bedrooms (both without closets) and no bathroom, and the only full bathroom in the house located on the first level off of the living room…completely open to the living room. You could literally watch someone take a shower, bath, etc. from the living room!

    Jason Fischman, ASA, IFA, AGA, RAA, HMS, GREEN
    Chief Valuation Officer
    Appraisal Evaluations, Inc.

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