Obsolescence. A five-dollar word that somehow found its way into every major industry.
One day you’re sitting in the office, and one of the guys starts complaining about how a huge house he has to sell is functionally obsolete.
If you’re a new agent and still learning about those ‘realtor’ terms, you might be scratching your head, wondering what the hell is he on about, and why is he so angry?
But your frustrated colleague has a point.
Functional obsolescence can be a big problem when selling real estate.
Many of the houses that have been on the market for a while suffer from that exact problem.
It’s estimated that by 2025, more than 50 percent of homes in the US will have some kind of a smart system installed. That’s a lot of talking houses.
That means the real estate scene could be in for a massive change, one that could leave the uniformed behind.
As a real estate agent, it’s in your best interest to keep up with all the latest trends.
This article will explain what functional obsolescence is, give you some examples, and try and help you deal with it.
What Is Functional Obsolescence?
Remember those old 50-pound boomboxes that were popular in the 80s?
Those were pretty great except for the person that had to haul it around.
Sure, they had great battery life, and they were loud as well, but boy, were they impractical.
The battery had to be changed, you had to have tapes with you, and they were huge.
Today, they would still serve their purpose. If you wanted to, you could play music on them, but why would you?
You have so much better alternatives that are three times smaller, pack the same punch, that can be recharged, and you can play anything you want via your phone.
I’m talking about wireless speakers.
You see, that’s functional obsolescence.
When something isn’t broken, but a more modern alternative has surpassed it.
In this case, it’s the boomboxes that have been replaced by wireless speakers.
A prevalent philosophy in today’s consumer society is: “If it’s not broken, don’t fix it, but if it’s obsolete, replace it.” That’s a free lesson in capitalism for you.
Now that we explained what functional obsolescence is let’s see how it appears in real-estate.
Functional Obsolescence In Real Estate – Smartphones And Smart Homes
Functional Obsolescence Comes In A Few Shapes And Sizes.
- Incurable obsolescence (IO) is when a home has a ‘deficiency’ that can’t be replaced or repaired.
- Suppose you have a four-bedroom house with just one bathroom, no balcony, and an impractical layout.
- In that case, you’re probably dealing with IO.
- You might be thinking those problems could be fixed, and you’re probably right.
- However, there are a few things to consider here.
- For starters, does it make sense to spend that much money on renovation since you’re probably not going to get it back when selling?
- When it comes to property value appraisal, it’s usually done by comparing houses in the neighborhood.
- An owner or an investor could spend a large amount of money fixing the house but never see that money back.
- Mainly because homes nearby were initially built with the same specs on which they had to spend money.
- Another type of IO is economic obsolescence.
- We need an entirely new article to explain this term properly.
- Still, in very few words, economic obsolescence is all the factors outside of the property that affects its value—things like schools, state of the neighborhood, roads, etc.
Thinking of both selling houses and appraising their value? We have an article on that exact topic. Click here if you want to find out if a real estate agent can also be an appraiser?
I Feel A Pulse
- Since there’s incurable, there’s also curable obsolescence (CO).
- We mentioned that adapting an old home to fit new standards is usually too expensive.
- However, suppose a property your selling needs a bit of DIY or an inexpensive exterior paint job.
- In that case, you should push the owners or investors into making that happen.
- This is called physical obsolescence.
- Some forms are incurable, like the entire house is about to collapse on itself. However, a lot of the time, that’s not the case.
- Things like painting the house, paving the driveway, buying new grass, or just properly cleaning everything inside and out goes a long way to increase perceived value.
- If a place looks rundown from the outside, it doesn’t matter how functional it is; most people will be put off by it.
“And We’re Gonna Have A Helipad, A Jacuzzi, And A Tennis Court….”
- Believe it or not, you can make a property that is too good for its own sake.
- Neighborhood dictates a lot when it comes to the standards of a house.
- Building a huge castle could potentially be an awful financial move if there are mostly three to four-bedroom homes around.
- This works as well if you have an older house and you decide to renovate.
- Upgrading it to such an extent that it’s better by leaps and bounds than the homes nearby can make it stand out too much, so much so that it becomes undesirable.
- This is where economic obsolescence comes into play again.
- An investor building a Beverly Hills type of mansion in the Projects (I have no idea how you would get the permit, but hypothetically speaking) is just burning cash.
Dealing With Functional Obsolescence
The best advice here would be, avoid it if at all possible.
Property owners can be unreasonable at times.
If someone insists on a price even though it’s obvious he/she is not going to get it, you could potentially have a burden on your hands.
Challenging yourself to sell something that isn’t that amazing is a great way to improve your skillset.
But, getting stuck with a substandard property to sell can stress you out tremendously.
New real estate agents will often get their hands on any client they can.
Still, they shouldn’t get discouraged if a house they’re selling is functionally obsolete.
Always give it your best, but be realistic as well. Most buyers want something modern and relatively new.
However, suppose your clients are more interested in the neighborhood than the house itself.
In that case, you can have a potential win-win situation. People who are coming up in the world will often want to surround themselves with those already up there.
That can be your major selling point. Sure, they’re not getting the best property around, but just by living there, they’re scoring points everywhere else.
Also, people that flip homes are often interested in those that are less expensive.
If you’re a real estate agent, you’ll want to ask around and see if you can find flippers that operate in your area.
They usually want to save every buck they can, which means paying a commission on anything is out of the question.
Some may be willing to cooperate, though, and you can help each other out tremendously.
Functional Obsolescence – Conclusion
Since even I’m getting tired of using the word obsolescence, ironically, making it kind of obsolete, it’s time we wrap this up.
The boombox analogy we gave explained what functional obsolescence is better than an average middle-school teacher explains the math.
If it’s old and there are way better versions of it, it’s functionally obsolete. Don’t dwell in the past but look forward to the future.
We’ve said that there are different kinds of functional obsolescence.
Depending on your preferences, you might start looking for a property that suffers from it in one way or another.
Experienced realtors can often turn a seemingly bad situation into a chance to profit from it.
For newer agents, we’ve said that avoiding functional obsolescence, in the beginning, is completely understandable.
If, on the other hand, you’re stuck with a functionally obsolete property, try to find a clientele that can benefit from it.
One man’s trash is another man’s treasure.