What is 'Functional Obsolescence'
Functional obsolescence is a reduction in the usefulness or desirability of an object because of an outdated design feature, usually one that cannot be easily changed. The term is commonly used in real estate, but has a wide application.
Functional obsolescence is a factor to consider for a number of reasons and applies to a wide range of situations.
BREAKING DOWN 'Functional Obsolescence'In purchasing new products, consumers should consider an item's long-term use in addition to the immediate-term need to mitigate losses from unnecessary purchases resulting from functional obsolescence. An item's functional obsolescence can make it less attractive to buyers if the item does not allow for upgrades or connectivity with new technologies. Items with constantly refreshed design features are also known for their functional obsolescence, since newer models are consistently produced and sold.
Home entertainment centers are an example of a consumer good that has been more modernized with new design features. These items have become more functionally obsolete as flat-panel televisions have replaced bulky analog televisions and consumers seek more up-to-date entertainment features. The old entertainment centers of the past are now too deep to accommodate newer thin televisions.
Companies also take into consideration functional obsolescence in long-term business planning. Depreciation of an asset provides one example of quantifiable functional obsolescence. Companies can use varying accounting methods for calculating the depreciation of an asset on its books, but the overall goal is to measure and track an asset's declining usefulness over time. This method of business planning also helps companies anticipate the need for sales and repurchases of new assets.
Functional Obsolescence and Real Estate
In real estate, functional obsolescence usually leads to a lower appraisal value. Real estate can exhibit functional obsolescence if its design features are outdated, not useful or not competitive with new and more modern designs. Additionally, functional obsolescence occurs when an older house remains within a newer neighborhood.
An original house in an older part of town that has two bedrooms and one bathroom could be considered functionally obsolete if all the other original homes in the area are torn down over the years and replaced with five-bedroom, three-bathroom houses. Because the old house does not have the capacity that most buyers want, it is said to be functionally obsolete, even if it is still in good condition and is perfectly livable. In the case of real estate, some features can potentially be renovated to overcome functional obsolescence, but others may be considered a deficiency.