What are examples of economic obsolescence?

What are examples of economic obsolescence?

Summary. Economic obsolescence refers to the loss of value of a real estate property due to factors that are external to the property. Common causes of economic obsolescence include a change in aircraft flight patterns, increased crime rates, construction of a busy highway, construction of a landfill nearby, etc.

What is an example of economic external obsolescence?

External Obsolescence is a form of depreciation caused by factors not on the property itself, such as environmental, social, or economic forces. An example would be a very nearby garbage dump. The homeowner cannot reverse this loss in value by spending money to fix something.

What causes economic obsolescence?

Economic obsolescence is a form of depreciation caused by factors that are not on the property, in the property, or even within the property lines. It can be caused by factors like the neighborhood experiencing a rise in crime. It can also be caused by economic factors such as problems in the job market.

What is the principle of substitution?

The principle of substitution states that the upper limit of value tends to be set by the cost of acquiring an equally desirable substitute, assuming no untimely delays. A prudent investor would pay no more for an income-producing property than it would cost to build or purchase a similar property.

What is a physical obsolete?

Physical obsolescence is the decline in a property’s valuation due to physical depreciation or gross mismanagement. It is a given that there will be physical deterioration in all real estate assets over time, but it can be managed with a proactive maintenance and replacement program.

What is incurable obsolescence?

Incurable obsolescence is a type of obsolescence that is not financially practical to cure. It occurs when it is too costly to fix the problem.

What is the cause of the loss of value?

The loss of value in capital goods is mainly due to two reasons: (i) Normal wear and tear and (ii) expected obsolescence.

What is economic obsolescence and why does it matter?

Economic obsolescence results in a decline in the value of a property, where the causal factors are not within the control of the property owners. It is sometimes referred to as external obsolescence.

What is functional obsolescence in commercial real estate?

Functional obsolescence refers to a reduction in the usefulness of a property due to factors within it, except those due to physical deterioration. It occurs when a building experiences a relative loss of utility due to either outdated equipment, faulty building design, or a building being too small compared to others in the neighborhood.

What is the economic obsolescence of intangible assets?

Some units may have none, while others may have substantial economic obsolescence resulting in lower profitability. When economic obsolescence is present in the fixed assets, valuation of intangible assets should be considered. Intangibles are often assigned minimal or no value when there is significant economic obsolescence in the fixed assets.

Is the income shortfall technique a good way to measure economic obsolescence?

Those appraisers would recognize the income shortfall technique as a good method but would suggest it be used with other supporting analyses of EO. In this case, use of the income/earnings methodology resulted in an economic obsolescence penalty of $122,300,000, which supported the above quantification of EO at 75%.