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What to know about functional obsolescence before buying property

On Behalf of | May 13, 2024 | Real Estate Law

When purchasing commercial real estate, you can never know what the future will bring. However, if you do your due diligence, you have a better chance of choosing a property that will increase in value and ultimately prove to be a wise investment.

That’s why it’s crucial to beware of “functional obsolescence.” The term might cross your mind every time you buy a new iPhone and realize it will be outdated in a few years. In real estate, functional obsolescence is defined as “the impairment of functional capacity of a property according to market tastes and standards.”

It can be impossible to avoid some amount of functional obsolescence in a property. However, by being able to identify it, you can factor that into how much you’re willing to pay for the property or decide that it’s not worth buying at any price. The following are key types of functional obsolescence and examples of each.

External obsolescence

This is a condition – or anticipated condition – outside the property over which you would likely have no control. This could be a planned airport that would subject the property to undue noise and traffic jams on nearby roads or freeways. A planned prison in the area could drastically lower property values. It’s also important to know if there are planned zoning changes that could restrict your business activities. A scouring of public records can prevent unwanted – and costly – surprises.

Curable and incurable obsolescence

Unlike external obsolescence, these involve conditions on the property itself. Some can be fixed (cured), while others can’t. If an older building isn’t Americans with Disabilities Act (ADA) compliant or has asbestos issues, for example, these can be fixed. As noted, that should bring down the price since it’s going to be costly to do so. If an older commercial property is in an outdated architectural style that clashes with the other properties in the area, that’s largely incurable without tearing it down and rebuilding it.

This is just a brief overview of functional obsolescence. Given the high price of real estate in Southern California, it’s crucial to know whether a property you’re looking at any examples of it before you make an offer. Having real estate as well as legal guidance can help you make a sound decision about any particular property that interests you.