What is functional obsolescence in real estate?

Functional obsolescence refers to a decline in property value stemming from characteristics that are undesirable or outdated compared to current standards. This often includes issues such as poor layout designs, outdated features, or a lack of amenities that are typically expected by buyers today. For instance, a home with a layout that feels cramped or lacks sufficient bathrooms for the number of bedrooms could be considered functionally obsolete.

While depreciation related to external factors, such as changing economic conditions, falls under external obsolescence, functional obsolescence is specifically tied to the internal features and layout of the property itself. It contrasts with concepts like appreciation due to a desirable location or value increases from renovations, both of which signify a rise in value rather than depreciation caused by deficiencies inherent to the property. Thus, the accurate representation of functional obsolescence is indeed related to the property’s poor layout or insufficient amenities.