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Sunday, October 14, 2007

Functional Obsolescence

Functional obsolescence in real estate is defined as - When a property’s value decreases due to its poor design, style or lack of modern facilities. Functional obsolescence is one reason why a home might drop in value. For example, the market value of a home that doesn’t have enough electrical power to run a dishwasher, microwave and hair dryer at the same time will steadily fall. Other than functional obsolescence, a property can also lose value due to poor maintenance or a slump in the economy.

This concept in real estate is one that is sometimes tough to get across to sellers in a way that doesn’t offend them. Before I got into real estate I lived for 21 years, starting in 1978, in another part of southeastern Michigan in a nice quad-level house. We raised our family there and I always thought the house was great. When I went to sell it in 1999 my agent tried to tell me about this concept in real estate called functional obsolescence, since tri- and quad-level houses had pretty much fallen out of favor by then, as had bi-level houses, sometimes called raised ranches. I didn’t understand and, of course, priced my house too high. It took longer to sell than I had hoped.

Now, after 5 years in real estate sales, I have a really good grasp of this concept. I’ve had (and have) a few of the homes that fall into this category. They were great homes when built and many are still very good homes. It’s just that people no longer think that bi-, tri- or quad-level homes are cool. So, they are harder to sell. People still prefer traditional colonial or ranch homes to those styles. Other styles that seem to be OK with today’s buyers are the Cape Cod and contemporary (so long as that doesn’t involve too many levels). That’s not to say that bi-, tri- and quad-level homes won’t sell at all – they will – they may just take a little longer to sell, because the pool of buyers who still likes those styles is smaller now.
Keeping in mind the whole definition above, homes that have outdated electrical, plumbing or heating/cooling systems are also functionally obsolete. I had a absolutely beautiful colonial home a couple of years back that stay on the market for far longer than it should have because in the basement was a huge “spider boiler” – a big old cast iron boiler with pipes and ducts running off it everywhere that makes it look like a giant spider. Several knowledgeable heating contractors told me that the boiler was an industrial type that would likely last for 50 years or better. Getting parts for it, should anything go wrong, was another matter. So, it scared the heck out of most potential buyers.

I’ve had the same thing happen with old, fused-based electrical systems. They just scare off many buyers; and, in many cases, they do prove to be a real restriction on modernizing the house, especially if the service is too small (under 100 AMPS). It may be a case of over-reacting but it happens. Many buyers also look for plumbing that isn’t the old cast iron pipe type or even the newer PVC-type, since both are purported to pose potential health issues. Some buyers will also walk away from homes that are heated with steam or hot-water baseboard systems; even though those are very efficient types of heating, because they generally don’t allow for central air conditioning.

So, what can the seller do? If it is something like an outdated boiler or electrical system, the seller could get those items replaced. Sure it costs money; and, that money is not likely to be recouped on the sale. But, if spending that money up front means a sale that takes place six months to a year earlier than might happen otherwise; that is money well spent. There are too many things that one cannot do anything about – how does one change the architecture of a tri-level house? Anything else that can be seen as obsolete and that can be changed should be dealt with before listing; or, the owner should figure the replacement costs into his/her pricing of the home.

A couple of areas that are more expensive but could be dealt with during the homeowners time in a house are the baths and kitchen. Many houses built in the 60’s and 70’s had only one bath, maybe a bath and a ½. Finding a way to add that second fu bath would help with the value when it comes time to sell. So, if an addition of any kind is in the cards; maybe, you could add another bath as a part of that project. The kitchens in 60’s and 70’s houses (even into the 80’s) were small by today’s standards. Many were the type that was boxed in with soffits from which cabinets were hung. Opening up those kitchens by removing the soffits can work wonders. Many homes were divided up into small spaces – a small kitchen and a small breakfast room next to it. Opening up that space into one larger area can make the home look more modern. You can’t overcome all of the layout limitations built into a 60-70’s home, but you can make them more modern looking and inviting to today’s buyers.

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