What is 'Functional Obsolescence'

Functional obsolescence, a term commonly used in real estate, is a reduction of an object's usefulness or desirability because of an outdated design feature that cannot be easily changed. The application of the term varies per industry.  For example, in real estate, it refers to the loss of property value due to an obsolete design feature, such as an old house with 1 bathroom in a neighborhood filled with new homes featuring at least 3 bathrooms.

BREAKING DOWN 'Functional Obsolescence'

Consumers can mitigate losses caused by functional obsolescence by considering the long-term usefulness of purchased goods. An item can be unattractive to consumers if its design prevents upgrades or connectivity with compatible devices. Many consumer electronics, such as smartphones, are known for their functional obsolescence due to the constant introduction of newer, refreshed versions.

Functional obsolescence is not exclusive to consumer electronics and real estate.  For example, before the late 1990s, most households were filled with bulky, heavy tube televisions.  As a result, entertainment centers were constructed to accommodate their weight and size.  Today, most households are filled with sleek, lightweight flat-screen televisions, rendering the old entertainment centers functionally obsolete.  To keep pace with the technological advances of consumer electronics, furniture manufacturers often redesign their products.

Companies also take into consideration functional obsolescence in long-term business planning. Depreciation of an asset is one example of quantifiable functional obsolescence. Companies can use various accounting methods to calculate 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 to sell or repurchase 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 Real estate can exhibit functional obsolescence if its design features are outdated, not useful, or not aligned with market tastes and standards, such as when an old house is located within a neighborhood of new homes.  Consider a 1950s house with 3 bedrooms and 1 bathroom located in a gated subdivision filled with 2-story 5 bedroom, 4 bathroom houses.  Because the old house does not have the capacity that buyers in this market 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.

RELATED TERMS
  1. Obsolescence Risk

    Obsolescence risk is the risk that a process or product used ...
  2. Value Engineering

    Value engineering is a systematic and organized approach to providing ...
  3. Consumption Function

    The consumption function is a mathematical formula that represents ...
  4. Functional Regulation

    Functional regulation is a concept stating that a company with ...
  5. Obsolete Inventory

    Obsolete inventory is a term that refers to inventory that is ...
  6. Real Estate

    Real estate is property made up of land as well as anything on ...
Related Articles
  1. Investing

    Real Estate Vs. Stocks: Which One's Right For You?

    There are ups and downs for both real estate and stock investments, so before diving in, know the differences between the two.
  2. Investing

    Bathroom Remodeling On A Budget

    These cheap and simple changes will make your bathroom look like a million bucks.
  3. Investing

    The 10 Habits of Highly Effective Real Estate Investors

    All successful real estate investors share these personal and professional traits, while following these business practices.
  4. Investing

    Is Now A Good Time To Invest In Real Estate?

    From carrying costs to investment risk, there's a lot to consider before you invest in real estate.
  5. Investing

    Strategic Bathroom Enhancements With Huge Returns

    Even modest investments to improve a small bathroom can yield considerable rewards.
  6. Investing

    A Guide to Real Estate Investing

    Investing in real estate is a popular choice for good reasons, but it's more complicated than owning your typical stocks and bonds.
  7. Investing

    A Guide to Real Estate Investing

    Investing in real estate is a popular choice for good reasons, but it's more complicated than owning your typical stocks and bonds.
  8. Personal Finance

    Microsoft Excel Features For The Financially Literate

    Here are some of Excel's functions and features that a financial professional can use to make his or her job more efficient.
  9. Retirement

    Is Real Estate Your Retirement's Secret Weapon?

    With stocks maybe peaking and fixed-income investments paying less and less, real estate could be the growth opportunity for your retirement portfolio.
RELATED FAQS
  1. What are some common functions of business intelligence technologies?

    Understand the common functions of business intelligence technologies, and learn how business intelligence is used to increase ... Read Answer >>
  2. What is the utility function and how is it calculated?

    Economists measure utility in revealed preferences by observing consumer choices and ordering consumption baskets from least ... Read Answer >>
  3. How can I calculate the hurdle rate in Excel?

    Learn how to evaluate potential investments. Common desktop software provides functions that can help make the decision with ... Read Answer >>
Trading Center