Understanding Property Obsolescence and Its Effects
The term obsolescence may be used when describing an object that no longer serves its intended purpose due to change in technology, change in the market or change in the requirements of the task it was previously used for. Obsolescence could be used to describe anything from a mobile phone, a vehicle or even real estate property.
In real estate, obsolescence can be used to describe the changes that affect a property causing it to lose value. Property obsolescence can be grouped into three main categories, namely: economic, physical and functional obsolescence. In this article, we shall look at the different types of obsolescence and the effects they have on real property.
Functional Obsolescence in Real Estate
This occurs when a real estate property loses its value due to an outdated design component, non-functional building elements or a change in the market preferences. These changes make the building less efficient or less desirable in the market.
For instance, partitions in residential properties have become less desirable over time, with most people nowadays preferring an open plan layout. Some forms of functional obsolescence in real estate can however be remedied by making changes to the design, updating building elements or taking the necessary steps to make a property more efficient.
Economic obsolescence in a property occurs when external factors occur and cause the property to lose value. An example of such is a construction project next door that causes too much noise could make tenants move out thus increasing the vacancy rates.
These external factors are usually beyond your control as a property owner or an investor and they could have a detrimental effect on the property’s value. Though economic obsolescence cannot be remedied when it occurs, one can still be proactive and find a way to prevent it. One way would be filing a noise complaint with the relevant authorities for the previous example. To avoid economic obsolescence, it is imperative that action be taken as soon as possible.
This is loss of property value that occurs from physical damage to the property either through negligence or poor management of the property. A property is said to be physically obsolete when the damage is extensive and the cost of repair becomes too much.
In some cases, when a property becomes physically obsolete, it becomes cheaper to demolish it entirely and construct a new one as opposed to renovating it. The best way to prevent physical obsolescence is by conducting routine inspections and property maintenance.
The Effects of Property Obsolescence
Regardless of the form of obsolescence that occurs in a property, the result is the same – loss of value. The effects of physical and economic obsolescence tend to be more immediate than functional obsolescence. However, only functional obsolescence in a property can be remedied. Physical obsolescence can easily be prevented but once a property’s condition reaches this point, it might be too expensive to remedy the situation.
It is important for property investors to understand obsolescence in all its forms. By understanding obsolescence, an investor can gain perspective on risk and the costs involved.
At Chris Price Realty, we offer premier real estate brokerage services in Austin, TX to help you find your stand-out property. Get in touch with us today for more information.