What is Functional Obsolescence?

By
Real Estate Agent with Keller Williams Preferred Realty

One of my favorite clients just asked me why a particular property in a very exclusive suburb (Edina) isn't selling. I visited the house and made my notes and here is the response I sent to my client:

"The home on [this street] has one critical problem - and in real estate we call it "functional obsolescence". You're aware that things like wallpaper, color palettes, and flooring become obsolete over time - and these things are more or less inexpensive to change. But what happens when a floorplan becomes obsolete? That's an expensive fix, as one has to move walls, move utilities, build additions etc. That being said, there is a price point at which it makes business sense to buy the property - when the price of the house + the price to remedy the functional obsolescence = market value (or equals less than market value, because that's equity in the home)."

I hope this little definition helps!

Robert

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Larry Bettag
Larry Bettag - Cherry Creek Mortgage - Saint Charles, IL
Regional Vice-President

Robert......good info!  That's what we see in appraisals from time to time!  Good stuff!

Aug 09, 2010 10:11 PM #1
Rainmaker
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Mike Martin
(909) 476-9600 ~ WeLoveSellingRealEstate.com - Fontana, CA
The TCR Group - Keller Williams Realty

I agree - good information and not something I think most people think about!

Aug 09, 2010 10:17 PM #2
Rainmaker
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Adam R. Cohn
STANDARD MORTGAGE CO. - Boca Raton, FL
We actually get mortgages closed FAST!

Thats a good post, to refresh people on real estate terms.

Aug 09, 2010 10:24 PM #3
Rainmaker
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Robert Stewart
Keller Williams Preferred Realty - Lakeville, MN

Thanks for the great comments - we have to consider functional obsolescence (and the cost-to-cure) when we're pricing homes. Although I think the list price of a home is fairly meaningless (a posting for the future, for sure), we have to consider the condition and layout that a buyer would *reasonably expect* in a given price range.

Thanks for all the initial support guys - It is as if I've been waiting for this present market for a long time.

Aug 09, 2010 10:41 PM #4
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Rainmaker
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Robert Stewart

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