What does the term “functional obsolescence” refer to in appraisals?

Functional obsolescence refers specifically to a loss of value in a property that is primarily attributable to outdated features or decreased desirability from market preferences. This concept captures scenarios where the property's design, layout, or functional characteristics no longer meet current buyer expectations or needs. For instance, a home with a small, outdated kitchen or a layout that doesn't accommodate modern living styles may experience functional obsolescence because potential buyers find these features less desirable.

Identifying and understanding functional obsolescence is essential for appraisers as it helps in accurately valuing a property based on its ability to meet current market demands. By recognizing that certain features can detract from a property's appeal, appraisers can make more informed assessments of its value relative to other comparable properties in the market.

In contrast, the other options pertain to different concepts in appraisal. External factors causing a reduction in property value relate to external obsolescence, while physical deterioration involves the tangible decline in a property's condition. The effect of location on property value touches on locational benefits rather than functional aspects specific to the property itself.