I came across a blog post by Bill Gassett, Massachusetts Realtor, called Functional Obsolescence in Real Estate this morning. To say I was intrigued by the title would be a blatant lie.
What could be more boring than an article about a house with features that have become obsolete over time, right?
So I skipped over the article and went on to something else.
However, something kept luring me back to my friend’s post. Perhaps it was a memory of a market analysis on a house in NW Albuquerque I did several months back for a friend of mine who had converted their two car garage to a family room. See homes for sale in NW Albuquerque.
I couldn’t shake the feeling, so after some time passed, I went back and read his post, which to my surprise (because of the subject matter, not because of his writing which is always top notch), was actually very good.
What is functional obsolescence (FO) anyway? The best way I can describe it is that functional obsolescence occurs when features of a house do not conform to reasonable expectations of home owners and home buyers in a neighborhood.
FO can manifest itself as a once acceptable feature in a home that has become obsolete over time, like only having one bathroom in a four bedroom house or having tiny closets in a master bedroom. It can also be about an improvement that does not conform to the neighborhood or the price range.
Still confused by what I’m trying to explain? To determine if a house has functional obsolescence trying filling in the blank in this statement:
“You would expect a house in this neighborhood and this price range to have a _________” (fill in the blank with the words ‘bathroom on the main floor,’ ‘dishwasher,’ smoke detectors, etc.).
Expectations Vary from Place to Place
Expectations and standards can very from city to city, so features that matter in other parts of the country may not matter at all here in Albuquerque. Take for instance, homes with basements.
Very few homes here have basements, only about 5% of homes (the best I can calculate) do. Since they are unusual you wouldn’t call a home without a one obsolete; you’d just call it normal.
However if that home was in Tulsa Oklahoma, where tornadoes are common and homeowners need basements to seek shelter from the storms, every house has one. So a house without a basement would probably be considered functionally obsolete in Tulsa. I say probably because I’ve never lived in there.
Now that we’ve got that cleared up, let’s talk about my friend’s FO.
My Friend’s Garage Conversion
When I went to look at my friend’s house, it was obvious right away that he was very proud of the garage conversion he had completed a few years back. Indeed, the room that was once the garage looked great. It was now a second living room for the kids, located right by their bedrooms. Mom and Dad, he boasted, could have what he called “parent” time while the kids were romping away in the back having “kid” time.
After oohing and aahing a bit to be polite (geez, I hope he doesn’t read this) I asked him how he was getting along without his two car garage.
He said he was doing fine without it. He said trading the two car garage, that was really just a place to park one car and store a whole bunch of other stuff, had really been a good decision for his rather large family. I sincerely congratulated him on making his home right for his family.
Does Functional Obsolescence Cost You Money?
When it came time to sit down at the kitchen table and talk about how much my friend’s home might be worth though, the conversation began to sour. Our difference of opinion in the value of his home was quite large, and he thought I was crazy.
“How can you tell me the extra family room in my house doesn’t add at least $10,000 to the value?” he practically shouted at me.
Somewhat apologetically I explained, “Most buyers will really want to have a garage in this neighborhood. Everybody else has one.”
You see, it didn’t matter how nicely painted the garage walls were, how nice the light fixtures were and how big the TV screen was. The lack of a garage made the home functionally obsolete.
So yes, FO can cost you money. In this case, not having a garage cost him about $10,000.
More About Garage Conversions in Albuquerque
Remember how earlier in this post I said expectations can vary from city to city? They can vary from neighborhood to neighborhood as well.
That garage conversion that was so out of place on Albuquerque’s west side might not be so out of place in Albuquerque’s northeast heights. In the older, more affordable areas of the city, homes were so small when they were built and many homeowners chose to turn their garages into living space. It’s probably paid off for them assuming it’s in a neighborhood where everybody else has done the same thing.
Is that NE heights house functionally obsolete? To tell you the truth, that’s a term appraisers use more than Realtors, so I’ll leave that up to them to decide (I’m thinking the answer is yes). That’s because in that part of the city you’d actually be surprised to have a two car garage, not the other way around. While you would get more money if you sold a home with a garage there, you wouldn’t be penalized as much if you had converted. It’s all about expectations.
by Albuquerque Real Estate Agent Rich Cederberg, eXp Realty, (505) 803-5012.
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