Real Estate Investing Basics

Real Estate Investing with Functional Obsolescence in Mind

Expertise: Personal Development, Real Estate Investing Basics, Business Management, Mobile Homes, Real Estate News & Commentary, Landlording & Rental Properties, Mortgages & Creative Financing, Real Estate Marketing
224 Articles Written
real estate investing functional obsolescence

Common sense and proper real estate investment training teach us to preform due diligence before entering into a purchase agreement with a seller. Good real estate investors are taught to determine Loan to Value (LTV), After Repaired Value (ARV), Repair Cost (RC) and Maximum Allowable Offer (MAO). These abbreviations, numbers and percentages allow us to assign an estimated value to a property compared to other homes of similar size, features and area.  With these numbers it is now possible for most of us to formulate a general idea of the current value of the home.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Experienced investors know that a property is not worth a penny until someone pays you for it.  You can’t eat equity. This post is on a subject I had to learn the hard way.  Functional obsolescence is defined as the impairment of the usefulness of a device or equipment due to a design defect. Anything that causes the majority of your potential buyers to pass on your property may be cause for alarm.

Do not get stuck with an investment property you can’t sell because of functional obsolescence.  A home that is functionally unusable or severely out of date may take “XX” extra months to sell, thousands more in holding costs, and thousands discounted off the sales price versus a functionally sound home.

Here are a few things to watch out for:

  1. Outside washer/dryer: Many homes built in the middle of the 20th century were built with an outside area to wash and dry clothes.  Assume that if you purchase these homes you will need to figure out some way to turn the modern convenience of inside washing and drying clothes to reality.
  2. Major road: Living and raising kids on the side of a major road is not many American’s idea of happiness.  The roadway may be a new city project or the result of a population growth over-time; either way the populated major road will lower the functionality of a home and its enjoyment/use.  A mentor of mine told me to lower the estimated value by 40% if a property sits aside a busy roadway.
  3. Odd bathroom out: I remember looking at a mobile home that was originally a 3 bedroom 2 bathroom home.  It was recently converted into a very spacious 2 bedroom 1 bathroom mobile home.  The second bathroom and 2 smaller rooms were all demolished and combined to make 1 “super-room”.  The only problem is if anyone has to use the bathroom they would have to walk through the master bedroom, or go outside.  Who in their right mind will buy a home like this? I did, and for a brief time I was happy.  This property took months to sell and was a tremendous pain in my rear.  However, this is a great story for another post.   Remember, the biggest rooms in the world will not help sell a house with an idiotic floor plan.

In the end, any structural problems or unorthodox characteristics that make the majority of your potential tenant/buyers not desire your property is a cause for concern.  If a home is functionally obsolescent, do not discard the potential deal.  Price cures all. If the home is functionally ugly and obsolete, make a low offer. Stay firm to your price, use this functionally problem to your advantage and get the best terms and lowest price possible.

– J. fed

Photo: jitze

Investing since 2002, John started in real estate accidentally with a 4-bedroom mobile home inside of a pre-existing mobile home park. Over the next 11 months, John added 10 more mobile homes to his cash-flowing portfolio. Since these early years, John has gone on to help 150+ sellers and buyers sell their unwanted mobile homes and obtain a safe and affordable manufactured home of their own. Years later, John keeps to what has been successful—buying, fixing, renting, and reselling affordable housing known as mobile homes. John shares his stories, experiences, lessons, and some of the stories of other successful mobile home investors he helps on his blog and YouTube channeland has written over 300 articles concerning mobile homes and mobile home investing for the BiggerPockets Blog. He has also been a featured podcast guest here and on other prominent real estate podcasts, authored a highly-rated book aimed at increasing the happiness/satisfaction of average real estate investors, and spoken to national and international audiences concerning the opportunities and practicality of successfully investing in mobile homes.

    Tod
    Replied over 9 years ago
    This is great advice. I think a lot of people don’t factor obsolescence into purchasing decisions. Despite real estate investment being a business decision, so many people still get caught up in the emotion of it all. Tod Maffin
    John
    Replied over 9 years ago
    Tod, Absolutely, I think we can all agree that investors and end-users look at property through 2 very different sets of eyes. And emotion plays a large part to many end-users. thanks for the comment. John
    Liz Voss with San Antonio Real Estate
    Replied over 9 years ago
    Well said John. Sometimes the new investor becomes emotionally attached to their investment, and will either pay to much for the real estate, or under estimate the amount of repairs needed. That doesn’t even take into consideration of any previous conversions such as your mobile home. Visit Liz Voss’s last blog at San Antonio Homes.
    John
    Replied over 9 years ago
    Lol! I know I have learned that lesson once of twice before. john
    Liz Voss with San Antonio Real Estate
    Replied over 9 years ago
    Well said John. Sometimes the new investor becomes emotionally attached to their investment, and will either pay to much for the real estate, or under estimate the amount of repairs needed. That doesn’t even take into consideration of any previous conversions such as your mobile home. Visit Liz Voss’s last blog at San Antonio Homes. Reply Report comment
    Liz Voss with San Antonio Real Estate
    Replied over 9 years ago
    Well said John. Sometimes the new investor becomes emotionally attached to their investment, and will either pay to much for the real estate, or under estimate the amount of repairs needed. That doesn’t even take into consideration of any previous conversions such as your mobile home. Visit Liz Voss’s last blog at San Antonio Homes.
    Liz Voss with San Antonio Real Estate
    Replied over 9 years ago
    Well said John. Sometimes the new investor becomes emotionally attached to their investment, and will either pay to much for the real estate, or under estimate the amount of repairs needed. That doesn’t even take into consideration of any previous conversions such as your mobile home. Visit Liz Voss’s last blog at San Antonio Homes.