Understanding Functional Obsolescence in Residential Real Estate

Most of us have heard of 'planned obsolescence' when it comes to consumer electronics: When manufacturers introduce new, updated versions of products with newer, cooler, better, faster, more desirable features...after you have already made a purchase.

In real estate, there is a similar concept called 'functional obsolescence.'

Homes, when they are initially built, conform to the norms of the times, the code requirements of the time, and the demands of consumers of the times.

Fifty years ago, when electricity was new, homes were built with electricity. But having a dishwasher? Unheard of. And getting to the basement, if there was one? Well, going outside was good enough. Nowadays, most buyers expect to get to a basement via the inside of the house...not the outside.

Functional obsolescence means that, while a home may be sound, well-built and in good condition, it is lacking in areas surrounding current trends, expectations, and amenities.

Here are some examples of functional obsolescence:

1) No bathrooms on the first floor
2) Bedrooms with no closest, or tiny closets
3) Walking through one bedroom to get to another
4) No dishwasher or other major appliance
5) No place to hook up a washer or dryer
6) A basement with only outside access
7) No central heating (or air conditioning) depending on the climate
8) Having knob-and-tube wiring or fuses instead of a circuit breaker box
9) No running water/electricity/indoor plumbing
10) No insulation, or original insulation materials like newspaper, etc.
11) One outlet per room; or NO outlets in some rooms

For some buyers and sellers, these are part of the quirks and charm of a place; but for lenders and appraisers, they can represent a problem. Some lenders will not lend money for home without certain modern amenities (like running water) because if you default on your loan, and the bank forecloses, they want a property that is easily sell-able to the most number of people. And your idea of rustic living without running water may not be the norm in your area.

Likewise, homes appraise for less than other like-homes in similar geographic areas and of similar age and style when they haven't been updated, and others may have been. While a home can maintain all its original features and charm, and be in excellent condition in terms of wear and tear, a home that doesn't meet the expectations of most modern buyers is worth less than a similar home that has been updated.

Do You Own a Functionally Obsolete Home? Perhaps you bought because of the charm and character...it's easy to keep those features with a smart contractor and thoughtful planning. Adding a first-floor half-bath or garage can be a huge improvement and turn your home into one that people will consider when you need to sell. As you're planning your budget and expenses, take the opportunity to consult a local Realtor and have them tell you what will update your home smartly...you don't want to spend money on things with little or no return to potential buyers. Plan your upgrades and updates thoughtfully and over time.

Thinking About Buying a Functionally Obsolete Home? Homes for people who want period details, charm, character and the warmth and feel of an older style often come at a price: poor maintenance, increased costs (bad insulation, leaky windows and doors; older, electricity-hogging appliances). See if you qualify for a loan that allows you to make updates and upgrades by rolling the costs into your loan. There are several programs that create such an opportunity and combining those with tax credits for modernization and energy efficiency may be just the thing.

Functionally obsolete homes are bad, just different, with a variety of challenges and opportunities, whether you're buying one or selling one or may do either in the future, careful planning can help keep the charm that draw so many people to older homes.