External Obsolescence

Definition

External obsolescence, or economic obsolescence, is the loss of value in a real estate property caused by external factors outside the control of the property owner. This form of depreciation is typically irreversible and can significantly impact property values. Common causes of external obsolescence include adverse developments in a neighborhood, changes in economic conditions, emerging legislation, and proximities to undesirable elements like industrial plants or noisy highways.

Examples

Neighborhood Deterioration: If a residential area experiences an increase in crime rates or a decline in maintenance, properties in that area may decrease in value.
Economic Downturn: Widespread unemployment and reduced economic activity can lead to decreased demand for property, thereby lowering its value.
Industrial Development: The construction of a large industrial complex near a residential neighborhood can cause noise and pollution, negatively impacting property values.
Regulatory Changes: New zoning laws that restrict property use can diminish the utility and therefore the value of a property.

Frequently Asked Questions

What is the difference between external obsolescence and functional obsolescence?
- Answer: External obsolescence results from external factors affecting the property, while functional obsolescence arises from issues within the property itself, such as outdated design or layout.
Can external obsolescence be reversed?
- Answer: It is typically difficult to reverse external obsolescence as it stems from factors that the property owner cannot control, such as neighborhood conditions and economic environments.
How does external obsolescence affect property appraisal?
- Answer: Appraisers account for external obsolescence by reducing the appraised value of a property to reflect the depreciation due to unfavorable external factors.
Can external obsolescence influence rental property values?
- Answer: Yes, external obsolescence can influence both sale and rental values. Negative external factors can decrease the desirability and thus the rentability and value of the property.
Are external obsolescence factors considered in property insurance?
- Answer: Typically, property insurance primarily covers physical damages rather than value depreciation due to external obsolescence. However, specific coverage might consider economic or regulatory developments affecting property use.

Functional Obsolescence: The decrease in property value due to outdated design or other intrinsic factors within the property.
Physical Depreciation: The loss of property value due to tangible wear and tear over time.
Market Value: The probable price at which a property would sell in a competitive and open market.

Online Resources

References

International Valuation Standards Council (IVSC). (2019). IVS 2019: International Valuation Standards. IVSC.
Appraisal Institute. (2020). The Appraisal of Real Estate, 15th Edition. Appraisal Institute.

Suggested Books for Further Studies

“Guide to Property Valuation” by David Mackmin and Gary Sams
“Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
“Property Valuation Techniques” by David Isaac, Mark Daley, and John P. Stewart

Real Estate Basics: External Obsolescence Fundamentals Quiz

### What factors cause external obsolescence? - [x] External factors such as neighborhood changes, economic downturns, industrial development, and regulatory changes. - [ ] Internal factors such as property design and layout. - [ ] Wear and tear of the building structure. - [ ] Personal choices by the property owner. > **Explanation:** External obsolescence is caused by factors outside the control of the property owner, often associated with the surrounding environment and economic conditions. ### How does external obsolescence typically affect property values? - [x] It decreases property values. - [ ] It increases property values. - [ ] It has no effect on property values. - [ ] It stabilizes property values. > **Explanation:** External obsolescence typically results in the depreciation of property values due to unfavorable external influences. ### Are property owners capable of reversing the effects of external obsolescence? - [ ] Yes, always. - [ ] Yes, but only with significant investment. - [x] No, it is usually irreversible as it is due to external, uncontrollable factors. - [ ] Yes, through regular maintenance and upgrades. > **Explanation:** External obsolescence is generally irreversible since it arises from factors beyond the property owner's control and does not depend on the property's physical condition. ### Can changes in local economic conditions reflect external obsolescence? - [x] Yes, economic downturns can cause external obsolescence. - [ ] No, economic conditions do not affect property values. - [ ] Economic conditions only affect functional obsolescence. - [ ] Economic conditions are irrelevant to real estate. > **Explanation:** Local economic conditions can lead to external obsolescence by affecting demand and property values unfavorably. ### What aspect of regulatory changes can lead to external obsolescence? - [x] New zoning laws restricting property use. - [ ] Advances in building technology. - [ ] Improvement in neighborhood facilities. - [ ] Increase in property tax incentives. > **Explanation:** Regulatory changes like new zoning laws can restrict property use, causing depreciation due to diminished utility. ### Which term is closely related to external obsolescence but occurs due to internal property issues? - [ ] Physical depreciation - [ ] Market value - [x] Functional obsolescence - [ ] Economic value > **Explanation:** Functional obsolescence occurs due to internal property issues such as outdated design or poor layout, unlike external obsolescence which is due to external factors. ### How do appraisers account for external obsolescence? - [ ] By increasing the property's appraised value. - [x] By reducing the property's appraised value. - [ ] By ignoring it if the building is new. - [ ] By adding a standard charge to the appraised value. > **Explanation:** Appraisers reduce the appraised value of a property to reflect depreciation caused by external obsolescence. ### External obsolescence is mostly--- - [x] Out of the control of the property owner. - [ ] Within the control of the property owner. - [ ] A direct result of poor maintenance. - [ ] Prevented by upgrading amenities. > **Explanation:** External obsolescence occurs due to uncontrollable external factors that are out of the property owner's control. ### Which example best describes external obsolescence? - [ ] Installing outdated electrical systems in a property. - [ ] Deterioration due to time and physical elements. - [x] Noise pollution from a new industrial complex nearby. - [ ] Redesign of the property’s interior layout. > **Explanation:** Noise pollution from an adjacent industrial development is an example of external factors causing depreciation, characteristic of external obsolescence. ### Is external obsolescence considered during property insurance assessments? - [ ] Yes, always considered. - [ ] No, it is irrelevant to property insurance. - [x] It depends on specific insurance coverage. - [ ] Only if the owner requests. > **Explanation:** While generally not covered, specific property insurance might consider external obsolescence based on economic or regulatory circumstances affecting property use.

External Obsolescence