Sadly, most people have never heard of Paul Revere’s brother, Bob – a real estate appraiser.
But in March of 1775, Bob noticed the residential real estate market was softening – so he rode his horse through Boston screaming “functional obsolescence is coming!, functional obsolescence is coming!”
Unfortunately, nobody paid attention or even understood what the heck he was saying… and as a result, a lot of sellers listed their properties for way too much.
Paul did pay attention, however, and he of course used a similar technique to warn about the British a month later, forever cementing his fame and leaving poor Bob pretty bitter.
I bring this up because if Bob Revere were around today, he’d definitely be riding his horse through a lot of softening markets.
It’s also a warning that various “flaws” that often get ignored in hot markets are definitely noticed by buyers AND appraisers in soft markets.
These flaws are known formally by appraisers as “external obsolescence” and “functional obsolescence.”
Functional obsolescence involves issues with the property itself that impact value, while external obsolescence involves issues outside of the property that impact values.
I have been through several real estate downturns, and here are a few examples of issues that often get ignored in hot markets but severely impact values in soft markets.
And remember, it is not just buyers who notice, appraisers seem more likely to call out obsolescence factors in soft markets too.
External Obsolescence Examples
- Freeways: A house next to a freeway will always be discounted, but in soft markets, we often see homes a few blocks away get dinged more severely as well.
- Railroads
- “Arterial Through Streets:” This might be the most important factor in this blog. These are not the busy main thoroughfares you see in every major city. They are instead the feeder streets that tend to be far busier during rush hour than the nearby quiet courts and small streets in a neighborhood. Agents and sellers alike often miss how much this type of traffic impacts values. Parents will pay a major premium for a quiet street or court.
- Cemeteries
- Visible office or retail buildings
- Large construction projects
- Nearby schools: Yes, it’s great when kids can walk to school. But nobody wants to be so close to the school that they are impacted by daily school traffic or “Friday Night Lights.”
Functional Obsolescence Examples
- Outdated Designs: I remember seeing a housing brochure from the 1970s that showed a happy couple drinking margaritas in their tennis clothes on their front balcony overlooking the street. And on the next page that same couple was drinking cocktails in their sunken living room. I am pretty sure both of those features never got used ever, and not just because the couple died of alcoholism. The designs were simply impractical. Even worse, I remember seeing a home brochure from the early 1980s with a cocaine room…(OK, I made that up). Anyway, outdated design features like balconies, sunken living rooms, closed off kitchens, brass fixtures, tiny bathrooms, fluorescent lighting, and outdated flooring seem to impact values much more in soft markets.
- Over Improvements: This is another big factor. A $200,000 kitchen remodel in a $400,000 home will never add $200,000 of value – the very definition of “functional obsolescence. ”Other types of over improvements that rarely increase values enough to match the cost include finished basements, finished unpermitted areas, a home that is much larger and nicer than surrounding homes, very expensive wall treatments, and converted garages. I have blogged several times about a couple who spent $100,000 on wall coverings that they insisted added $100,000 of value to their home – when it in fact probably detracted from the value.
Long story short: Sellers and agents definitely need to account for these factors in softer markets. Because if they don’t, buyers and appraisers will – and the homes will sit.
