What is functional obsolescence?

Functional obsolescence refers specifically to a reduction in a property's value caused by outdated features or designs that make the property less desirable or efficient compared to more modern alternatives. This concept encompasses aspects such as inadequate layouts, outdated technologies, or features that fail to meet the current standards or expectations of potential buyers or tenants.

For instance, a home with a small kitchen and a lack of modern amenities might experience functional obsolescence when compared to newer homes that feature open floor plans and energy-efficient appliances. This type of obsolescence is distinct from other factors that can affect property values, such as market fluctuations, which deal with external economic forces; physical wear and tear, which relates to the physical condition of the property; or changes in tax policies that might affect the economic viability of a property investment. Understanding functional obsolescence is crucial for appraisers in accurately assessing a property's current value in the context of its features and market position.