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Obsolescence refers to the loss in value of property improvements due to internal or external factors that makes those improvements no longer useful.
The meaning of obsolescence can confuse some when used in the real estate industry as we often hear about planned obsolescence in the world of smart devices and appliances when newer technology makes previous ones obsolete.
Do be mindful that for real estate it does not mean that houses are no longer useful and cannot serve as a residence anymore.
There are basically two types of obsolescence.
- Functional obsolescence
- Economic obsolescence
Functional obsolescence refers to functional factors (or lack of) within a property that can seem ridiculous with little common sense.
For example, a four bedroom apartment house with only one bathroom can seem odd and somewhat illogical. A 500-unit condominium that only has a 100 square feet swimming pool to cater to residents can also seem absurd.
Economic obsolescence occurs due to factors that exist outside the property. This is why it can also be called external obsolescence or environmental obsolescence.
Examples include the rise of crime in the neighborhood that has led to property prices plunging. Or a the construction of new highway entrances and exits that leave shopping malls void of visitors.