Understanding Obsolescence in Building Components

All building components and materials undergo obsolescence. As materials or components age, they fail. Many homebuyers fail to recognize the need to update or replace these critical components when buying homes.

Obsolescence can be physical, functional or economic based. In commercial real estate we refer to physical obsolescence as the decline in a property’s valuation due to physical depreciation or gross mismanagement. Functional obsolescence refers to a decline in value due to architectural design, building style, size, local economic conditions and outdated technology; in other words, the building has lost value due to it being “outdated”. Economic obsolescence refers to a decline in value due to external factors which are not economically feasible to change such as adverse location, traffic, social or cultural changes or proximity to nuisance properties.

Lipstick On A Pig

The trend in buying urban homes in older communities is popular. Often these homes have had some level of rehabilitation such as redesigned kitchens/baths, roof replacements, HVAC replacements, new paint and updated flooring, a/k/a, a flip house. Savvy investors know people want to buy close-in and they also know curb appeal along with updated kitchens sell houses! Rarely do we find these flippers have repaired/updated the really important components like foundations, windows, insulation (beyond a little blown-in in the attic), trees and other site conditions. Building inspectors like to call this, “lipstick on a pig”.

County Property Appraiser’s assign an obsolescence factor to buildings for tax purposes. They recognize a structure loses value over time as it ages. Communities in decline (socially or economically) lose value and this is also reflected in the property assessment based on the average sales price of homes in the community. While a new home in a new community may be assessed at $140/sf (or more), these distressed homes may be assessed at $60/sf (or less). In other words, the value of a distressed/aged home may be in the land whereas the value in a new home is in the home itself (although lot prices in popular new communities are quite high).

Today’s Market

The problem we encounter today is the premise that “any home” is worth the same price per square foot. Today we are seeing older homes with minimal upgrades selling for “new” value. Once the home is completely upgraded to address structural, plumbing, site conditions, etc., the ownership cost may actually be twice the cost of new construction. This may still be a good deal provided the property is located in a truly desirable location where we can reasonably predict rapid escalation of property values but for most buyers, you are already priced out of those markets, i.e., Manhattan, San Francisco Bay area, beach property, etc. Deals still exist in those markets but you will need to be well funded to participate when “fixer-uppers” cost millions to buy.

I have worked with homebuyers for many years and almost without fail, buyers downplay obsolescence if the home meets their location and visual requirements. Often, they convince themselves this work will be passed on to the next owner when they sell in 3-5 years and sometimes, this strategy works but sooner or later, one unlucky buyer will be left holding the bag with an unsaleable home. Let’s hope it is not you.

Functional Obsolescence

Every building component has a functional obsolescence (think life cycle). Mechanical components, wall cladding roofs, windows, doors, structural framing and plumbing will fail due to exposure, material degradation, neglect or prolonged usage. While most homebuyers recognize the need to replace aged water heaters, roof shingles or AC systems, most lack any understanding of the life expectancy of other building components or the cost associated with repairs/replacement when they fail. The most common of these are:

1. Aged plumbing lines.
2. Aged septic systems.
3. Wall cladding such as wood plank siding, stucco, brick/stone veneer or brick.
4. Mature trees which are in contact with the foundation.
5. Foundation issues in crawlspace construction.
6. Site drainage issues.
7. Aged windows.
8. Missing insulation in walls.
9. Aged electrical wiring and service panels.
10. Poor indoor air quality associated with superficial energy updates, poor ventilation or improperly designed HVAC system upgrades.
11. Termites and other wood destroying organisms.

Each of these issues can cost many thousands of dollars to repair and many of these correlate to others (meaning missing insulation along with poorly designed HVAC systems can correspond to poor indoor air quality for example).

Market Volatility

Historically, real estate values cycle. There are ups and downs in pricing and market volatility. If you own homes long enough, you will experience the joy of appreciation as well as depreciation as the market changes. Newer home buyers can’t comprehend the feeling of seeing their home value drop 30% but I assure you that you will. This is especially depressing when you find your new kitchen is sitting on a failed foundation and you can’t borrow money on the equity in your home to fix it.

When you are considering buying an older home or a home which has been flipped, make sure you hire an experienced home inspector who can identify these expensive issues and take this information into account in making your purchase decision. Buying an older property may not always be the best financial decision for you.

Property360

William Chandler is a licensed General Contractor and Home Inspector with over 40 years of experience. Property360 provides home and commercial building inspections in the Jacksonville and Orlando metro areas of Florida. Contact us at (904) 503-9808 to request an inspection today!