Introduction
External obsolescence may not be a term you come across every day, but it holds significant importance when it comes to real estate investment. In this article, we will delve into the concept of external obsolescence, exploring its impact on property value and why it's crucial to consider when purchasing real estate.
Image: A Look at External Obsolescence
Understanding External Obsolescence
To understand external obsolescence, let's break down the term. "External" refers to a source outside the subject affected, while "obsolescence" refers to the process of becoming obsolete and outdated. In real estate, obsolescence leads to a loss in value. Therefore, external obsolescence refers to depreciation caused by factors beyond the control of the property itself.
Economic obsolescence is another term used interchangeably with external obsolescence, both denoting the same phenomenon and serving as forms of depreciation.
Types of External Obsolescence
Now that we grasp the concept, let's explore the various types of external obsolescence. Examples include properties located near airports, heavily trafficked highways, or businesses emitting unpleasant odors, such as paper plants or food processing facilities. Zoning changes can also contribute to external obsolescence.
Appraisers play a crucial role in identifying and reporting how these external factors affect property value. They analyze sales data of similar properties within proximity to understand the impact of these external influences.
Assessing External Obsolescence
Appraisers employ different methods to assess external obsolescence. The sales comparison approach involves analyzing recent sales of similar properties subject to external influences. By doing so, the impact of external obsolescence is accounted for in the sale price, as buyers consider the property's location in their offers.
If sales within the affected area are limited, adjustments can be made using sales from outside areas while considering the difference in location. Rental income comparison and cost analysis approaches also assist in estimating the value of the subject property.
It's important to note that not all properties in specific locations are negatively affected by external obsolescence. Appraisers must rely on sales data from the same neighborhood whenever possible, avoiding unnecessary location adjustments.
Conclusion
External obsolescence poses unique challenges when it comes to property value, as it is not easily curable. By understanding the concept and considering its influence, investors and buyers can set realistic expectations regarding property value and make informed decisions.
If you have any questions about external obsolescence or the appraisal process, feel free to reach out. Thank you for reading!
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Author: [Your Name] Expertise: Real Estate Appraisal and Investment
