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The Three Types of Obsolescence

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    • Matty J Jenkins
  • Exp Broker / Dream Team Lead
  • Investor
  • Dream Team Leader
  • Licensed over 20 yrs

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Agenda

Three Types of obsolescence in Real Estate

  1. Physical Obsolescence
  2. Functional Obsolescence
  3. Economic Obsolescence

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This Photo by Unknown Author is licensed under CC BY-SA-NC

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Introduction

There are three types of obsolescence or flaws that cause properties to lose value:

Functional obsolescence occurs when a property loses value due to its architectural design, building style, size, outdated amenities, local economic conditions and changing technology.

Economic obsolescence occurs when a property loses value because of external factors such as local traffic pattern changes or the construction of public nuisance type properties and utilities such as county jails and sewer treatment plants on adjoining property.

Physical obsolescence occurs when a property loses value due to gross mismanagement and physical neglect resulting in deferred maintenance that's usually too costly to repair. T

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Topic one

Physical Obsolescence

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Common Physical obsolesces in Real Estate

Exterior

Wood rot , old shingles , insect damage , decayed decks , concrete steps or stonework crumbling, yard full of junk fences broken , cars

Windows , wooden , vinyl seals gone , broken or missing , no locks , screens.

Roof 3 tab , worn , leaks ,Moss

Interior issues

Doors, old wooden doors , punch holes , cheap lauan doors, hardware tarnished& broken.

Kitchen cabinets old styles , ugly cheap particle board , 60-70 -80s

Counter tops laminate , tile , wood.

Bathroom tile blue , pink , broken missing ceramic , claw foot tub , shower walls moldy broken

Floors , carpet stained , worn , vct tile asbestos , wood floors worn , buckled , out of level

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Summary

Most Physical obsolescence can be repaired , replaced and properly budgeted for with experience those costs can be determined and reasonable assurance of ROI and added ARV . Offering at Tom’s 70% rule is a conservative model for most investors ARV X 70%- construction costs equals offer price some go as high as 80%.

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Topic Two

Functional Obsolescence

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Common Functional obsolesces in Real Estate

Functional Obsolescence: Functional obsolescence occurs when a property loses value due to its architectural design, building style, size, outdated amenities, local economic conditions and changing technology.

1 bathroom only on first floor

2 low ceilings in cape houses and steep stairs

3 wooden windows with storms

4 wooden gutters

5 radiator steam heat , oil heat , no air conditioning

6 cut thru bedrooms

7 3 tab roof shingles and old slate (unless historic costly)

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Summary

Often functional obsolescence is more costly or even impossible to cost effectively change to maximize return these items must be scrutinized more closely and can seriously increase costs and or diminish ARV if not dealt with.

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Topic Three

Economic Obsolescence

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Economic obsolesces in Real Estate

Economic Obsolescence: Economic obsolescence occurs when a property loses value because of external factors such as local traffic pattern changes or the construction of public nuisance type properties and utilities such as county jails and sewer treatment plants on adjoining property.

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Worcester factories closed it was too far from Boston for commuters , economic obsolescence put homes at a low sale price for decades.

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Summary

  • Economic Obsolescence effects both purchase price and ARV negatively.
  • But factors creating this obsolescence can also be reversed over time or by improvements in infrastructure , business and economic impacts and offer opportunity if correctly timed or held for long term .

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Summary

Do you think Worcester will continue its growth and redevelopment in 2023 and beyond ?.

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Airport investment , American & Jet blue , Woosox, multifamily housing stock in demand , economy has changed since covid.

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Successful Flip in Plymouth

  • Purchase $280,000
  • Renovation and Carrying costs $98,000
  • Sold $480,000

*Physical obsolescence – kitchen , flooring 2nd floor , paneling , first floor bath.

*Functional Obsolescence – paneling , staple up ceiling tiles , only 1 bath off kitchen

*Economic Obsolescence - Has been reversed Nuke closed , work from home has changed commutes , former cottages now year-round homes .

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9 Falmouth Transformation

Before

After

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9 Falmouth Transformation

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After

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9 Falmouth Transformation

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After

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9 Falmouth Transformation

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After

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9 Falmouth Transformation

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After

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9 Falmouth Transformation

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After

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9 Falmouth Transformation

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After

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Thank you ��like & follow @DREAMTEAM.MA

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Thank you

  • Matthew Jenkins

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