Friday, August 19, 2011

What is functional obsolescence?

 Today started out like most days.  I had an appraisal in southern Hardin County and I knew I was going by a truck stop I like to stop at, so I took my son along.  I try to use appraising to teach the kids when I bring them along, so today we worked on identifying addresses on an MLS sheet, following directions and opening doors for ladies.  Then the real lesson started, which I’m sure Derek didn’t get.

I got a call shortly after leaving home that a homeowner wanted me to come by and measure his home because he though it should have more SQFT than it did based off a recent appraisal.  To make a long story short, he thought his home was worth more, and the cure to getting more value out of it was to pick the SQFT apart.  After measuring his home and explaining how we measure homes and why (that’s another story an ANSI standards), I steered the conversation to the source of his value issue, functional obsolescence.

Functional obsolescence is an impairment of desirability and usefulness caused by new inventions, changes in design, and improved processes for production (Appraisal of Real Estate 12th Ed.).  Let me illustrate.  In the 80’s, builders typically built low to moderately priced homes with only one bathroom and small bedrooms.  Over the years however, people have come to demand a 2nd bathroom and larger bedrooms.  If you were to isolate the median sale price of several similar older homes and do the same with the newer homes and all other things being equal, you may find a consistent difference in value.  That difference is the amount of functional obsolescence.  Another example would be a washer and a dryer located inside a bedroom.  Who wants Mom coming into their room at 5:30am to do a load of wash?  There may be some functional obsolescence associated with these areas.  I keep saying “may” because sometimes the market doesn’t take into consideration the obsolescence if it’s a feature that they may still want. 

Remember the home I was measuring?  It has one bathroom, no central air, ceiling height under 6’5” in the kitchen, crawlspace and no garage.  This is in a market that typically has multiple bathrooms, central air and some kind of parking (carport, or some sort of garage).  I was amazed that the homeowner was hung up on a few SQFT and didn’t notice the big red elephant in the room. 

Does someone make a functional obsolescence removal kit?  Well, not really.  You can stay on top of it by regularly maintaining your home and updating it every so often.  Here are a couple questions you can ask yourself or those in the know: Is there a new feature that new construction homes have that mine does not have?   Has there been a change in building code?  Before shelling out the bucks on your next remodel job, it would be a good idea to do some research.  Talking to your Home Owner Association, a local building inspector, a REALTOR, a builder, an appraiser or a home improvement store salesman will give you a good start.  Needing updates may vary based off how progressive of an area you live in.

Part of my job is to help the general public have a warm fuzzy feeling about dealing with appraisers.  Mr. Homeowner was about to throw all appraisers under the bus because he felt he had been ripped off, but after I took the time to educate him, he now has a better understanding and a game plan.  On the other hand, I would hate to be the next appraiser to walk into his house, because he will be all over him/her like white on rice!  Derek took all this in stride, because ultimately, he was looking forward to eating at a restaurant with Dad. 

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