PHYSICAL, ECONOMIC AND FUNCTIONAL OBSOLENCE

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Obsolescence, as we generally think, is the process of becoming outdated or outmoded.

However, from a real estate perspective, obsolescence is defined as a loss in the value of a property or real estate caused by certain factors.

There are three types of obsolescence in estate management, namely; physical obsolescence, economic obsolescence, and functional obsolescence.

Let's take a closer look at each one of them in this post.

Physical obsolescence

This is arguably the most obvious type of obsolescence in that it can easily be seen and visualized.

Physical obsolescence is the loss of property value due to wear and tear. It is usually caused by gross mismanagement on the path of the owner.

Physical obsolescence is inevitable in that all properties will suffer from wear and tear. However, with the help of proper property management,  the overall effect of physical obsolescence can be reduced or mitigated by the real estate owner.

Functional obsolescence

This refers to the loss of property value caused by an obsolete feature.

Functional obsolescence is the reduction in value caused by obsolete architectural design, outworn amenities, and outdated building styles.

For example, many people prefer the iPhone to the android because they feel iPhone has certain features which are not readily available on android phones. 

In this case, android phones may be regarded as functional obsolescence since it lacks some feature of iPhones.

As another example, consider a house built in 1990 within a neighbourhood of recently-built homes. These new homes will have some features and designs which are non-existent in the old house. Therefore, This 1990-home is said to be functional obsolescence.

Functional obsolescence can also be defined as the impairment of a property's capacity which makes it unfavourable to the market tastes of the user.

Functional obsolescence does not suggest a real estate is not in good condition, rather, it means that a property has become less useful because its designs are archaic and can't be easily updated.

Economic obsolescence

This refers to the loss of real estate value caused by factors that are external to real estate.

Economic obsolescence, also called external obsolescence, occurs when a change in the surrounding environment causes the real estate to be less attractive thereby decreasing the real estate value.

This kind of economic obsolescence may occur when firms producing demerit goods are allowed to locate next to a residential building.

For example, an oil-producing company located in a residential area could cause economic obsolescence. This is because only a few people will fancy the idea of living in a residential area where there is high pollution.

As another example, consider a sewage treatment plant located next to real estate. Such real estate will become economic obsolescence because living close to sewer treatment is unsafe.

Economic obsolescence can also be caused by the removal of vital infrastructure. For example, if the government decides to remove a bus stop from a residential area, living in such an area may become less attractive as many people will find it inconvenient to live in an area where access to public transport is stressful.

Another example is when the government closes an international airport. Certain properties (like hotels and other hospitality services) located next to the airport will become economic obsolescence because fewer cars now drive by their locations.

Another factor that can cause economic obsolescence is a rise in crime.

The value of real estate is also dependent on the crime rate. Real estate located in this crime-ridden neighbourhood may be economic obsolescence because no one will want to live in an unsafe place. After all, no one wants to die.

As you will learn subsequently, economic obsolescence is usually incurable as it is not easy to change the adverse effect.

Returning to our example "government closing international airport". The hotelier or owner of the hotel can do practically nothing to reverse this decision as it's outside of his power. Hence, it is considered incurable.

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Curable Vs Incurable Obsolescence

Obsolescence, from a real estate perspective, can also be bifurcated into two forms: curable and incurable obsolescence.

A. Curable obsolescence: Real estate is said to be curable if the increase in the value of the real estate would exceed the anticipated cost of repairing the property.

B. Incurable obsolescence: Real estate is considered incurable if the increase in the value of the real estate is lesser than the anticipated cost of repairing the property.

For example, if a building has a faulty foundation, then it is incurable obsolescence as the cost of rebuilding will be lesser than the incremental increase in the value.

Potential real estate owners can avoid incurable obsolescence by making proper research before committing to buying real estate.

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