After re reading your question I'm finding it difficult to see how economic obsolescence applies in this scenario.
Also referred to as external, location, or environmental obsolescence, this type of depreciation occurs outside the subject property. Typically this type of obsolescence occurs sometime after the property is built, as the environment around the home changes.
Examples include airport noise, toxic waste, nuclear power plants, freeway noise, dust and air pollens, changes in zoning, and more. For this reason, properties located next to the freeway or under a flight path will experience reductions in value. Some even say that economic obsolescence occurs when market demand changes. Consider a home with only one bathroom. If all the new properties in the area are being built with two or more bathrooms, obsolescence can occur.
Most economic obsolescence is incurable, mainly because it is out of the control of the owner of the subject property, and any effort to cure such a problem would be very costly and value depleting.
That said, itâ€™s important to understand obsolescence and the effect it can have on the value of your home. Often times appraisers will note some kind of obsolescence, which can make financing very difficult. In fact, some lenders may decline your mortgage application if they find obsolescence on the appraisal report that they feel is a detriment to the value of the property.
Consider all this when selecting a piece of property, as issues even miles away can pose a threat to the value of your home.
Being that what you are describing is not "outside the subject property" I hardly see where this applies.
When properties are built, they donâ€™t always adhere to the standards of a given neighborhood, floor plan, or site design. When this happens, depreciation is caused by a loss of building utility, otherwise known as functional obsolescence. In other words, if a building has reduced usefulness due to poor design, the value must be also reduced.
Examples include buildings that are too big or lavish within a certain area, which is considered an overimprovement, or a property that is relatively small or poor compared with those around it, which is considered an underimprovement. If a building is said to be out-of-place or poorly designed for its location, it could be considered functionally obsolete.
If a property lacks a feature such as sideyard, or only contains one bathroom despite having five bedrooms, functional obsolescence occurs. Keep in mind that it can be curable or incurable, depending on the situation. If itâ€™s possible to tear out a wall or add a room, assuming cost is less than the value benefit, itâ€™s considered curable. Incurable obsolescence is typically defined as an overimprovement that will suffer value loss whether kept intact or removed.
Now base on part of your question: "We already have an extension to the house which makes it different from other 3 bed/2 baths in our area, it also makes our square footage same as other 4 bed/2.5 baths in the neighborhood." If I'm interpreting this correctly there are already other 4&2.5's in your neighborhood.
What it sounds like you want to do is make your present 3/2 look like other 4/2.5's that currently exist in your neighboorhood. You also indicated that "it won't affect the flow of the house as much" That being the case I am having a difficult time seeing how you would suffer from functional obsolescence.
If you wish to pursue this please feel free to email me a few pics [email@example.com] showing these improvements/alterations, etc. We will be happy to evaluate them for you at no charge. In addition to being a RE broker I've also been and continue to me a general contractor for the past 25 years.
One our specialties has been remodeling and room additions. Additionally my daughter is a seasoned and very successful interior designer who has specialized in high end homes in Rancho Santa Fe, La Jolla, Del Mar and throughout the San Diego area for 12 years. Together I'm sure we could render a sound and professional opinion. Good Luck.