What is defined as the loss of value to a real estate improvement caused by functional problems?

The correct answer is functional obsolescence, which refers to the loss of value to a real estate improvement due to design flaws, outdated features, or the inability to meet current market expectations. This type of obsolescence occurs when a property's design or layout becomes less desirable over time because it fails to fulfill the needs or preferences of buyers or tenants.

For instance, a house with a single bathroom may lose value compared to newer homes that offer multiple bathrooms, reflecting changing buyer preferences. Functional obsolescence highlights the impact of these internal aspects on a property's overall value, distinguishing it from other forms of depreciation that focus on physical condition or external market factors.

In contrast, physical deterioration involves wear and tear from age and use, market obsolescence pertains to changes in the market conditions that affect property values, and economic obsolescence relates to external factors that negatively impact a property’s value, such as high crime rates or neighborhood decline. Understanding these distinctions helps clarify how various factors contribute to a property's marketability and overall valuation.