Functional Obsolescence (Real Estate)

The loss of an object's utility or appeal due to the property's obsolete features according to current market taste and value.

If you're an investor, you're aware that profit and functional obsolescence have an inverse relationship; if functional obsolescence exists, profits will suffer. But have you thought about what the term implies or how to avoid it? 

Before buying a property, consider looking for features that are eye-sores, in need of repair, or flawed in design.

Sometimes one fails to notice such flawed features in a home because the homeowner either does not want to see the issue or is essentially wearing blinders and cannot see details that may be unappealing to others.

To evaluate such property features, one should walk through each room of their home as if they were a buyer, making a list.

Here are a few examples that will give you an idea: 

  • No garage 
  • Small or awkward layout
  • Outdated kitchen and bathroom
  • Small bedrooms
  • Electrical and plumbing problems 

These are some examples of functional antiquation in real estate. 

What Is Functional Obsolescence in Real Estate?

Now that we understand some examples, the following breaks down this real estate term and how it can harm your property. 

Functional obsolescence is the loss of an object's utility or appeal due to an antiquated design element that is difficult to update or replace. The term holds various meanings for different aspects of a property based on different industries. 

For example, smartphones lose value when a newer model enters the market due to a lack of advanced features expected by the market demographic. 

For real estate, it relates to the property's obsolete features according to current market taste and value. 

Everything depends on what the buyers expect. The surrounding area, facilities nearby, etc., will affect the property's value. 

If you have a property, list down all the good aspects that improve the property's value, like if there are grocery stores and other frequently-used businesses close by, multiple car garages, or a safe neighborhood with a community park. These factors can be capitalized on by the owner and will positively impact the property's value. 

Suppose there are any negative features like the location of the house being in a busy intersection or near a garbage dump, swamp, place with mold and decay, etc. In that case, the property's value will be negatively impacted, and the buyer may ask for a price reduction or not go ahead with the purchase. 

For example, 3BHK (3 bedrooms, one hallway, one kitchen property) with only 1 bathroom, or having the only property in the neighborhood without a car garage. The property becomes less desirable as the renovation cost will reduce the profit and lead to more expenses.  

Types of Obsolescence in Real Estate 

Obsolescence, as we commonly understand it, is the process of becoming obsolete or out of fashion. 

Everything needs to be upgraded, from software to food to real estate. Any industry requires continuous improvement to meet market demands and present an improved product.

Without upgrades, property slowly becomes unappealing to the majority. If the property is not preferable, there is a reason, and the buyer may conclude that the product is not worth the price. Finding out what is causing your real estate to lose value is a critical step in overcoming it.

Determine if there are any features to be concerned about that will affect the property's value. Because it is impossible to avoid them at all times, the earlier you start, the better.

We discover things that are making the property obsolete and can be classified into various categories.

In the real estate industry, obsolescence is a decrease in the value of a property or real estate due to certain factors.

The factors that can make a property obsolete can be classified into various brackets.

In estate management, there are three types of obsolescence: physical obsolescence, economic obsolescence, and functional obsolescence.

A) Economical

A property experiences economic obsolescence when it loses its value due to factors that are external to the property. It's usually incurable, and there's not much an owner can do to reduce the depreciation of the property. It is also called external obsolescence. 

Factors include busy roads near residential property, sewage systems near the property, a rise in local crime, etc. These are unchangeable by the owners but can be foreseen. City plans can be checked before the purchase of the property.   

B) Functional

A property can become obsolete when it loses its market value due to factors within the architectural design, changes in market demands, or its function. 

If old buildings are not updated, they will lose value to modern tenants seeking upgraded properties. If deemed profitable, these issues can be "cured" by the owner's investments. 

C) Physical

This refers to the loss of property value due to mismanagement or physical depreciation over time.

True physical obsolescence occurs when maintenance requirements are not fulfilled, and the property physically deteriorates to the point of no longer being desirable. 

Changes can be made if they are cost-effective and relatively inexpensive to the owner and if the cost is covered by increased occupancy or higher rents. Mold and mildew, for example, can form over time, making the space unfit for accommodation. 

Understanding Functional Obsolescence 

When considering altering your property to combat functional obsolescence, you can consider long-term returns, where profits will cover the renovation cost and continue to provide returns on investment. 

However, if these changes are irreversible or unwanted by the buyers, they may negatively impact the profits. 


The world of real estate keeps evolving, and people's preferences hold value. They will manipulate the property's retail value. Older products pass out of use due to market trends and competition.

Keeping up requires expenses; the owner needs to decide if each expense is necessary or not. This can be tricky at times, as owners might not know all the factors affecting price.

Companies also consider obsolescence when making long-term business plans. When an asset keeps depreciating, it's called quantifiable functional obsolescence.

There are various methods to calculate the depreciation of an asset's value. The ideal goal is to measure and track asset depreciation over time. This will help a company predict when to buy or sell the asset. 

Though it sounds tedious, one can benefit significantly from this constant awareness and assistance. Knowing when to invest and when not to is crucial in all industries. Such constant assessments will make this process a lot easier and more accurate. 

Functional Obsolescence and Real Estate   

Functional obsolescence usually relates to the loss of value of a property. Market demand and needs will determine the property's real value. The absence of certain features that are now common or in demand will impact its price. 

Functional Obsolescence

Granted, this generally happens when one disregards maintenance or if it's an old property. It's also possible if the features are unnecessary or high maintenance. For instance, a house may have "over-improvements" if the owner renovates and adds features that may not be essential. 

The subjectivity stems from the fact that various factors influence a property's price. If addressed, some real estate features referred to as "curable" can help slow functional obsolescence. 


When a property is out of date, neither the owner nor the neighborhood can enjoy it. A "curable" property might need money spent on demolition and junk removal, which could result in more losses for the owner or investor.  


Some examples of functional antiquation in real estate are: 

  1. The ratio between a home's number of bedrooms and bathrooms. A house with multiple bedrooms but a single bathroom will be functionally obsolete. 
  2. A small, single-story house built in a gated neighborhood with large two-story homes could also be out of place. The property's condition does not matter if it does not meet the required market demands and needs.  

Types of Functional Obsolescence 

We all have days when we make mistakes or have issues to tackle; you see something similar while dealing with real estate and its obsolescence. Everyday problems include fixable issues (known as curable in the real estate industry) and issues that can't be helped (known as incurable). 

Superadequacy is also something to look out for, as it is usually avoidable if one knows where investment is necessary and where it isn't. One could say it's an expense that is self-inflicted by the property owner. 

1. Curable  

Curable obsolescence is frequently brought on by the physical deterioration of a property that can be easily repaired. If fixed, quality and value will improve.  

Other common causes include a lack of certain features trending in the market. This can be fixed by purchasing the desired features. Alternatively, the presence of unimportant features or damages can also be curable.  

2. Incurable

Events out of the owner's control are the inevitable factors making a property incurable. An investor can look into the latest trends in the real estate market before buying. 

Incurable obsolescence is a form of obsolescence that's not practical to cure financially. It occurs when it's too costly to mend the issue.  

For example, an old house in a modern neighborhood with no garage for a buyer with multiple cars or too much damage due to low maintenance. In short, it is too costly to renovate and would not provide adequate returns if it was improved.

The price of the renovations will be much higher than the profit from the sale. The initial stages of acquiring a property involve appraising and thorough investment into such factors. The valuation will be done after considering this type of obsolescence. 

Regular traffic is an incurable factor for a house near a busy intersection, making it 'incurably' obsolete.  

Avoiding such factors is only possible when thorough research on the property is conducted. 

3. Superadequacy  

While it will seem counterintuitive, an owner can over-improve their home to the extent that it lessens the resale value.  

For example, a home with an indoor swimming pool is fun but also too costly for many homeowners to maintain. Keeping up with such an unnecessary maintenance cost will reduce its value.  

How to Tackle Functional Obsolescence 

For some investors or property owners, functional antiquation won't be a deal-breaker. Your dealer can get you a good deal for such a property. Some assessors may decrease the value of a house because of functional features that you find attractive or are willing to adjust to. 

Tackling functional obsolescence

If you are aware of a property's condition, you can ask the appraiser to evaluate a property from a cost perspective, not a sale perspective. 

The appraiser will value the home based on what it would cost to demolish and rebuild it rather than comparing its worth to similar homes currently on the market, also known as replacement cost.  

Such obsolescence is the main reason for regular inspections. It can be intimidating for some individual investors. Constant research and agility are common amongst the best investors.

This is why it may be preferable to engage with a knowledgeable partner, such as a private equity firm, who may add years of experience to a deal. 

Experiences like these can assist you in avoiding the harm caused by obsolescence and taking proactive measures to deal with it. 

Through a private equity investment framework, investors can give capital, leaving the difficult task of worrying about obsolescence to the company with the know-how and means to handle it. 

Key Takeaways
  • Obsolescence describes outdated goods and services that no longer meet market demands.  
  • There are three categories of obsolescence under commercial real estate investment: functional, economical, and physical.  
  • Obsolescence is either curable or incurable, while super adequacy refers to an overly-renovated property.  
  • Old buildings are a prime example of functional obsolescence that is curable. 
  • An outmoded architectural design is a good example of incurable because it requires complete renovation of the building.  
  • An experienced partner, like a private equity firm, that brings in years of experience and knowledge about the market is an asset. It can help avoid such obsolescence.

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Researched and authored by Paritosh RajyaguruLinkedin 

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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