Oh, I know it is functional. I do a lot of reviews these days and someone else asserted it was external. I was trying to see if there was a school of thought in that regard.
Yes, there is, and I mentioned Betts & Ely, authors of "Basic Real Estate Appraisal" which I believe was the California appraiser textbook before FIRREA. The ARE (12th ed.) does conclude that age, itself, which represents a change in the use of a building as modernization occurs, is functional in nature. But that, again, involves the design of the building.
External obsolescence may involve the building only, the land only, or it may involve the whole property (from TARE, pg. 412, 12th ed) and as Betts & Ely explained, "Generally, economic obsolescence is caused by some event that has occurred in the neighborhood since the property was built." and go on to say, "Deciding whether to classify a particular loss in building value as functional or external obsolescence is sometimes difficult. ... buildings once considered adequate may no longer measure up... Since the cause of such obsolescence is clearly related to external factors (change in market demand) one might argue that the loss in value should be labeled economic obsolescence. However, the usual practice is to categorize it as functional obsolescence, just as if the defect had been present since the time of construction."...
Simple enough but let me give you an example why I would consider external obsolescence in some cases. A 3,500 SF home of high quality is highly sought property in my region, basically on a larger lot, and basically would need to be close to the I-49 (formerly I-540) corridor that stretches from the Missouri state line south through Bentonville, Rogers, Springdale, and Fayetteville. There are a lot of such homes within 10 miles of these towns. There is no functional obsolescence. A couple years ago I appraised an estate and warned the trustee that the property would suffer in the marketplace because it is about 30 miles from the interstate and thus outside the normal area such executive homes exist. Local farmers do no build such homes. So it was sold with 40 acres for about $475,000 after being on the market for a year, and we knew that the dwelling cost over $900,000 when new, about 6 years earlier. There is no flaw in the design or layout. It is simply a French Chateau that is out of the market area for French Chateau. We have a number of similar such homes in that school district, but they simply are not on the market often as they are custom built for people who have a lot of money. The pool of buyers for such rural located executive mansions is very small. Yes, you could call it "over-built" and a super-adequacy but it isn't over-built nor super-adequate in the right market. So in my opinion, it is the location that is the issue. 20 miles further east and this puppy would have sold for $200,000 more plus.
Again, I find no defect in the design, loss of utility, or any change in the utility due to construction techniques and styles that are now out of date. And similar property regional would sell higher, and demand for land and dwellings are high locally, but just not that kind of dwelling. It is, in my opinion, suffering from a locational external obsolescence. But clearly one can make a case that it is "functional" in nature...which hopefully does not lead us to conclude everything outside physical deterioration is functional. In the case of an older commercial building that is out dated, yes, it is best called functional obsolescence. But when a dwelling is not impacted by same, but simply at the high or low end of the market spectrum that it "lives" in, then perhaps external is the best descriptor. Personally, I doubt it matters much except we need to address that loss in value.
