Functional obsolescence occurs when an asset becomes less useful or desirable due to an outdated design that can’t easily be updated or changed. (Tweet this!) In recent decades, functional obsolescence is most often the result of new technology; a good example is
VHS videotape
.
What is an example of functional obsolescence?
What Is Functional Obsolescence? … For example, in real estate, it refers to
the loss of property value due to an obsolete feature
, such as an old house with one bathroom in a neighborhood filled with new homes that have at least three bathrooms.
Which of the following is the best example of functional obsolescence?
Which of the following is the best example of functional obsolescence?
Old fashion architecture such as massive cornices
, would be classified as functional obsolescence.
What is an example of curable functional obsolescence?
Curable obsolescence
As the name suggests, curable functional obsolescence refers to any deficiency that can be cured by the property owner. For example,
if physical depreciation can be fixed by repairing and renovating the subject property
, then the obsolescence would be considered curable.
How do you find functional obsolescence?
Symptoms suggesting the presence of functional obsolescence are
excess operating cost, excess capital cost, over-capacity, inadequacy, and lack of utility
.” A few examples will help illustrate the elements of this definition.
What causes functional obsolescence?
Types of Functional Obsolescence
Curable obsolescence can be caused by
a lack of specific fixtures that can be remedied by purchasing the required fixtures
, the presence of a fixture that is no longer important to the property, or the lack of a fixture(s) that can be remedied by replacing the required item.
What is highest and best use in real estate?
Highest and Best Use, Defined
The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value
.
What is an example of external obsolescence?
External Obsolescence is a form of depreciation caused by factors not on the property itself, such as environmental, social, or economic forces. An example would be
a very nearby garbage dump
. The homeowner cannot reverse this loss in value by spending money to fix something.
What is the difference between functional obsolescence and economic obsolescence?
Functional obsolescence refers to a reduction in the usefulness of a property due to factors within it, except those due to physical deterioration. … Unlike functional obsolescence, which occurs within a property,
economic obsolescence occurs outside the property and is beyond the control of the property owner
.
What is NOI in real estate terms?
Net operating income
(NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses.
Is functional obsolescence a type of depreciation?
Functional Obsolescence. Functional obsolescence is
depreciation
that is attributable to an item or feature within the subject property that is no longer useful or functional. This impaired feature results in loss of value (depreciation) for the entire property.
What are the two types of physical depreciation?
Depreciation is divided into two types:
physical deterioration and obsolescence
. Physical deterioration, as the name implies, is a loss in value due to normal aging and deterioration.
Is physical deterioration curable?
Physical deterioration may be due to the action of elements such as floods, earthquakes, fire, ultraviolet sunlight, wind, etc. The
deterioration may be curable or incurable
, depending on the economic feasibility of carrying out the repairs.
What are the types of obsolescence?
- Technological Obsolescence.
- Functional Obsolescence.
- Legal Obsolescence.
- Style/Aesthetic Obsolescence.
- Economic Obsolescence.
What is depreciation obsolescence?
Within the real estate sector, depreciation and obsolescence are related to asset quality. It follows that higher quality represents a barrier to depreciation and obsolescence. … The value of their commercial real estate decreases due to some form of obsolescence. Depreciation is
a loss in the value of use of the asset
.
What is the difference between functional and external obsolescence?
An example of functional obsolescence is one bathroom in a 12 bedroom house. External obsolescence is
the diminished utility, or loss in value
, from causes in the neighborhood but outside the property itself, such as a change in zoning, loss of job opportunities and other external detrimental conditions.
Which best defines highest and best use of land?
The definition of highest and best use is as follows:
The reasonable, probable and legal use of vacant land or an improved property
, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
What is economic or external obsolescence?
Economic obsolescence (EO) is
the loss of value resulting from external economic factors to an asset or group of assets
. EO is often encountered in valuation work performed for financial reporting purposes, bankruptcy emergence and in other practice areas when dealing with companies in capital-intensive industries.
What is a highest and best use study?
1: “
That reasonably probable and legal use of vacant land or an improved property which is physically possible, appropriately supported, financially feasible
, and that results in the highest value.” 12.34.
Why is highest and best use important?
Why is the highest and best use so important in the appraisal process? It is because the highest and best use
determines the most profitable use of the site
, whether the subject is vacant land or an improved property on the site.
What is environmental obsolescence?
Summary. Locational obsolescence occurs
due to factors that surround the property
. The loss of property value is exerted on the property by external forces and environmental changes in its surroundings. Locational obsolescence is also known as external or environmental obsolescence.
What is an abstract of the title?
The abstract of title is
a brief history of a piece of land
, and it is used to determine whether or not there is any kind of claim against a property. The abstract of title includes encumbrances, conveyances, wills, liens, grants and transfers.
What are the three kinds of depreciation quizlet?
- Age – life method.
- Market extraction method (sometimes known as the sales comparison method)
- Breakdown method (sometimes called the observed condition method)
What is ROI in real estate?
Return on investment
(ROI) is a metric that helps real estate investors evaluate whether they should buy a property and compare, apples to apples, one investment to another.
Is mortgage included in NOI?
Never include your mortgage payments or taxes
in the NOI calculation, those are not considered operating expenses. … The calculation excludes capital expenditures, taxes, mortgage payments, or interest. Investors use NOI solely to judge a building’s ability to generate revenue and profit.
What does cap stand for in real estate?
It’s simple: Cap Rate. If you’re new to real estate investing, a cap rate—short for capitalization rate—is a primary metric we use to forecast the ROI from our property. This number is calculated as the ratio between the net operating income produced by your property and the original capital cost or its current value.
What is Deteriorative property?
is the
property of the material to stand
.
chemical reactivity with the environment, corrosion, and resistance
.
What depreciation means?
The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation
represents how much of an asset’s value has been used
.
What is the modified age life method?
The Modified Economic Age/Life Method of estimating depreciation is
used when a building has a significant amount of curable physical depreciation and/or curable functional obsolescence
. Subtract the cost to cure all items of curable physical and functional depreciation. …
Economic obsolescence, sometimes known as social obsolescence,
occurs when property values decrease because of external factors
. With functional obsolescence the loss in value to a property happens because issues pop up related to age or design factors.
What are the three forms of depreciation?
When it comes to a business’ personal property assessments, there are three forms of depreciation:
physical, functional obsolescence, and economic obsolescence
.
What is the physical deterioration in accounting?
Physical deterioration is
the loss in the physical efficiency of an asset as it ages
. Efficiency in this context refers to the asset’s ability to produce a quantity of capital services for a given amount of inputs. It is a synonym for “wear and tear” or “ decay”.
What are some examples of planned obsolescence?
Software lock-out
Another example of programmed obsolescence is
making older versions of software
(e.g. Adobe Flash Player or YouTube’s Android application) unserviceable deliberately, even though they would technically, albeit not economically, be able to keep working as intended.
What is system obsolescence?
System obsolescence is
a big issue
, and companies often don’t realize their components and systems are obsolete until it causes a crisis. Understanding the status of your system and components will help you make meaningful changes and upgrades that will help you get more life out of your systems.
