What Is Functional Obsolescence?
Let me explain functional obsolescence directly: it's the drop in an object's usefulness or appeal because of some outdated design element that you can't easily fix or update. You see this term applied differently across industries. In real estate, think of it as a property losing value from an obsolete feature, like an old house with just one bathroom in a area where new homes all have three or more. It also covers outdated tech, such as an older smartphone or computer processor that's fallen behind.
Obsolescence Risk
Obsolescence risk is straightforward—it's the chance that a company's process, product, or technology becomes functionally obsolete, making it uncompetitive in the market. You need to factor this in if you're running a business or investing.
Key Takeaways
Here's what you should remember: functional obsolescence means a reduction in usefulness from an outdated, hard-to-change design. As a consumer, you can cut your losses by thinking about the long-term value of what you buy. And while people have tried to measure its impact in real estate objectively over the years, appraising it is usually subjective.
Understanding Functional Obsolescence
You can protect yourself from functional obsolescence by focusing on long-term usefulness when buying things. An item might turn off buyers if its design blocks upgrades or compatibility with other devices. Consumer electronics are notorious for this, with new versions constantly making older ones obsolete.
Take bulky tube TVs from before the late 1990s—households built entertainment centers around their size and weight. Now, with slim flat-screens everywhere, those old centers are functionally obsolete. Furniture makers redesign to keep up with tech changes.
Businesses factor this in too. Depreciation tracks an asset's declining usefulness over time, using various accounting methods. This helps plan for selling or replacing assets.
Tip on Planned Obsolescence
Keep in mind that planned obsolescence is a deliberate strategy where companies make sure a product becomes outdated or useless within a set period.
Functional Obsolescence and Real Estate
In real estate, functional obsolescence typically means lower appraisal values. It happens when design features are outdated, useless, or out of sync with market preferences, like an old house in a neighborhood of new builds.
It can go the other way too—over-improvements, where a homeowner adds unnecessary features. Despite attempts to quantify it objectively, assessing functional obsolescence in real estate is mostly subjective due to the many factors in pricing. Some features can be renovated to fix it.
Examples of Functional Obsolescence
Picture a 1950s house with three bedrooms and one bathroom in a gated community of two-story homes with five bedrooms and four baths. Even if it's in good shape, it's functionally obsolete because it doesn't meet buyer expectations.
In tech, smartphones evolve quickly, making older models obsolete with new features. Companies sometimes push this by dropping support for old devices—Apple has faced criticism for not updating or servicing outdated iPhones.
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