Functional Obsolescence in Real Estate – What does it mean to you?

Functional Obsolescence

This past week I toured 22 homes. These 22 homes all were priced between $500,000 and $800,000, had direct gulf access and a pool, although they were not directly ON the river or Gulf of Mexico. They were all in Fort Myers, Florida. I did this over three days. I was taking the tour to educate myself for a listing presentation for a home that also fit in this category. By the time I got to this listing presentation I darn sure knew the competition for my client’s home and where it should be priced. (By the way, if you ever looking to list your home, a good question to ask your potential Realtor; “How many homes like mine did you recently visit that are like mine?”)

But I came away from this tour with an uneasy feeling about Functional Obsolesce and its effect on salability. Of the homes I saw, the days on market, that it to say the amount of time the house was on the market and not been sold varied from 22 days to 276 days. The factors that affect days on market are of course varied and include Location, Condition, Features, Age and Functional Obsolescence – all boiling down to price.

“Definition of ‘Functional Obsolescence’ A reduction in the usefulness or desirability of an object because of an outdated design feature, usually one that cannot be easily changed.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,” Source: Investopedia

Investopedia’s definition of Functional Obsolescence is pretty standard – I did a pretty exhaustive Google search. Original I thought that there was a functional obsolescence as well as a style obsolescence – sort of like the difference between two foot deep TV alcove and outdated wallpaper. But I was wrong. The obsolescence does not have to be really functional, it could be just style. In fact, in older homes up north that had gas lighting fixtures, a new home owner might not rip this functionally obsolete light OUT, he would renovate – because it has current style appeal.

Indeed in a 1927 home with natural wood wide trim and base board, a home owner would not replace these items, but would refinish them. But buy a 1992 home, however, and you are more than likely to rip OUT the windows and the 2 ½ inch cove molding – you would not refinish them.

Some items that render a home functionally obsolete may be deal breakers:

· Low Ceilings

· Lack of Closets

· Small Rooms

· Tiny Bathrooms

· Chopped up Layouts and Design

· Low Sinks and Counter tops

· Energy Inefficient

Other easy to understand items include

· Outdated Wiring

· Outdated Plumbing

· Wall air-conditioning instead of Central Air

· “Dated” Kitchens and appliances

The challenge in the market today is that some of the functionally obsolete homes are hard to pinpoint as to exactly WHY they are functionally obsolete.

A few of the homes I was in this past week just needed new molding, better doors and trim, and a good paint job. Some needed more neutral paint colors – some colors are out of date – as were the wall coverings and furniture – all making the viewer more tuned into the age of the house and the outdated style. It’s difficult for a realtor to explain to his client that his style is outdated or that his heavy drapes are hurting not just the value of his house, but the salability.

Some “easy fix” Functionally Obsolete items

· Color

· Window Coverings

· Flooring

· Fixtures

· Knobs

· Electrical Outlets

· Wall Coverings

· Decoration

Tear down or Renovate?

Some functionally obsolete homes are in areas that are very desirable – for example the area off McGregor near downtown Fort Myers. Prices are on the way up, but there are homes that are in the “twilight zone” of pricing – expensive or impractical to buy and fix up and way too expensive for a tear down and build new. So they languish on the market because resale pricing doesn’t yet support the total cost of the house, the teardown and the rebuild AND they are grossly functionally obsolete

I always look for “Good Bones” in a renovation home candidate – this means good layout, solid contraction, and high ceilings and headers.

The decision to tear down or renovate is easier of you already live in the house. It becomes a personal taste issue and an economic one.

I will have two homes listed later this year – one ON the River – not so functionally obsolete you wouldn’t want to live in it, but the price of the land alone and the surrounding homes will allow for an easy decision to tear it down and rebuild. One of homes we will list is one of the “borderline” homes. The surrounding homes may not yet support a total tear down and the cost of renovating may be too high. How to price this home is an issue. We are getting contractors in before we make a recommendation to the home owner.

So What?

Well, if you are buying, look for good bones in any functionally obsolete home. If you are selling , be honest with yourself and make sure your Realtor is honest with you. Try to eliminate as many functionally obsolete items as economically feasible. I would add this: If you are living in a home that will soon become functionally obsolete – think about selling now unless you are prepared to update your home. Older condos, for example, with low ceilings, lack of open porches and small confined kitchens are functionally obsolete for example. Will appreciation be as great as in a new condo? I say no.

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