If properly maintained and minimally updated, most homes should last 100+ years. Please note the words "properly maintained."
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an acceptable remaining economic life for a newer CB home is 100 years.
- Thread starter SunbeltAppraisals
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If properly maintained and minimally updated, most homes should last 100+ years. Please note the words "properly maintained."
George Hatch
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For a cost approach in a market value appraisal I would add the following:
4 - prevailing land use and economic trends in the neighborhood.
A 100-year old home of average/serviceable condition and similar utility as the other homes in the neighborhood may have a long ways to go yet before those improvements reach the end of their economic lifespan. A 20 year old house in good condition but which represents an underimprovement for the site within the context of the prevailing economic trends in the neighborhood may have already exceeded its economic lifespan, its physical condition notwithstanding.
My point is that the physical attributes are not the only factor in a depreciation analysis for a cost approach in a MV appraisal. Cost does not necessarily equal value. That's the difference between a CA to MV and a contractors cost breakdown. One is in search of a value indication in the marketplace (indirect though it may be in some cases) and the other is in search of an estimated cost to build.
Incidentally, the M&S tables and their 55-year economic lifespan for a typical SFR is based in part on what they refer to as the "Extended Life Theory of Loss", and places more emphasis on the analysis of the remaining economic lifespan than on estimating effective age. The rate of depreciation is curvilinear, not straight, and it maxes out at 80%, not 100%. In fact, in the methodology used in M&S it is the effective age that is treated as the residual (econ life - remainder = eff age) rather that the other way around. (econ life - eff age = remainder) that most appraisers were trained to use.
In other words, the M&S depreciation "method" is almost reversed when compared to how most appraisers were trained to approach an age-life depreciation analysis. Many (possibly most) appraisers who use the M&S tables do so without using the methodology upon which it is based. In effect they are inadvertently mixing and matching methodologies in the same analysis. That's why they have trouble understanding the use of the arbitrary 55-year economic lifespans in M&S.
4 - prevailing land use and economic trends in the neighborhood.
A 100-year old home of average/serviceable condition and similar utility as the other homes in the neighborhood may have a long ways to go yet before those improvements reach the end of their economic lifespan. A 20 year old house in good condition but which represents an underimprovement for the site within the context of the prevailing economic trends in the neighborhood may have already exceeded its economic lifespan, its physical condition notwithstanding.
My point is that the physical attributes are not the only factor in a depreciation analysis for a cost approach in a MV appraisal. Cost does not necessarily equal value. That's the difference between a CA to MV and a contractors cost breakdown. One is in search of a value indication in the marketplace (indirect though it may be in some cases) and the other is in search of an estimated cost to build.
Incidentally, the M&S tables and their 55-year economic lifespan for a typical SFR is based in part on what they refer to as the "Extended Life Theory of Loss", and places more emphasis on the analysis of the remaining economic lifespan than on estimating effective age. The rate of depreciation is curvilinear, not straight, and it maxes out at 80%, not 100%. In fact, in the methodology used in M&S it is the effective age that is treated as the residual (econ life - remainder = eff age) rather that the other way around. (econ life - eff age = remainder) that most appraisers were trained to use.
In other words, the M&S depreciation "method" is almost reversed when compared to how most appraisers were trained to approach an age-life depreciation analysis. Many (possibly most) appraisers who use the M&S tables do so without using the methodology upon which it is based. In effect they are inadvertently mixing and matching methodologies in the same analysis. That's why they have trouble understanding the use of the arbitrary 55-year economic lifespans in M&S.
Ken B
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The OP asked a question regarding REL. Most of the discussion in the thread has been physical life.
A couple of months ago I appraised a brand spanking new warehouse condo project. There were 18 units, tilt-up concrete walls, twin-T concrete roof structures, impact-resistant glass storefronts. The physical life of the structures was likely to exceed 65 years. However, due to economic conditions which changed between the time when the project was first planned and when the project was completed, there was a near complete lack of demand for the the units. Analysis of land values compared to the value of the property as a sell-out project or as a rental project indicated that the value of the land exceeded the value of the project.
In theory, these brand new warehouse properties had zero remaining economic life.
A couple of months ago I appraised a brand spanking new warehouse condo project. There were 18 units, tilt-up concrete walls, twin-T concrete roof structures, impact-resistant glass storefronts. The physical life of the structures was likely to exceed 65 years. However, due to economic conditions which changed between the time when the project was first planned and when the project was completed, there was a near complete lack of demand for the the units. Analysis of land values compared to the value of the property as a sell-out project or as a rental project indicated that the value of the land exceeded the value of the project.
In theory, these brand new warehouse properties had zero remaining economic life.
Ken B
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As a follow on...
The basic premise of REL regards the appreciating nature of land, which is durable, immobile, and of limited supply and the depreciating nature of buildings.
When plotted, the physical life line of a building will resemble a downward sloping sawtooth pattern. When first built, the building may be forecast to have a physical life of 50 years. Using straight-line depreciation, the life of the building will decrease 2% annually. However, at some point, it is likely that the building will receive major renovations. Long-life physical components of the building will be replaced and the remaining physical life of the building will jump upwards to something near 50 years. At that point, the next "tooth" begins with the periodic depreciation of the building.
In theory, with regular renovations, the actual life span of the building could be many centuries.
However, during the life of the building, land should be appreciating. So long as the building adds some contribution to the overall value of the property, the highest and best use of the property is to continue its existing use. In some cases, land may appreciate faster than building replacement cost. The economic life of the building ends when the building no longer contributes to the overall property value. In a highly stable market, it may be effectively impossible to forecast, with any credibility, when the building will no longer contribute to overall value if the building receives periodic renovations. Thus, the difference between remaining physical life and remaining economic life can blur.
In a stable market, it is reasonable to estimate the remaining economic life of the building as the remaining physical life assuming that no periodic renovations will be performed. As there is no guarantee of those renovations, it would not be prudent to assume their occurrence. Thus, in the case of the 25 year old residential property which has received typical and routine maintenance, but no renovations, if the physical life expectancy of the building is 50 years, it is reasonable to conclude the building is 50% depreciated and the remaining economic life is 25 years. If, during the next year the building is renovated, a future appraisal is likely to report substantially less depreciation and a longer remaining economic life.
That conclusion may not be reasonable in a changing market.
Each property is different. And that's a good thing for us. It keeps us relevant.
The basic premise of REL regards the appreciating nature of land, which is durable, immobile, and of limited supply and the depreciating nature of buildings.
When plotted, the physical life line of a building will resemble a downward sloping sawtooth pattern. When first built, the building may be forecast to have a physical life of 50 years. Using straight-line depreciation, the life of the building will decrease 2% annually. However, at some point, it is likely that the building will receive major renovations. Long-life physical components of the building will be replaced and the remaining physical life of the building will jump upwards to something near 50 years. At that point, the next "tooth" begins with the periodic depreciation of the building.
In theory, with regular renovations, the actual life span of the building could be many centuries.
However, during the life of the building, land should be appreciating. So long as the building adds some contribution to the overall value of the property, the highest and best use of the property is to continue its existing use. In some cases, land may appreciate faster than building replacement cost. The economic life of the building ends when the building no longer contributes to the overall property value. In a highly stable market, it may be effectively impossible to forecast, with any credibility, when the building will no longer contribute to overall value if the building receives periodic renovations. Thus, the difference between remaining physical life and remaining economic life can blur.
In a stable market, it is reasonable to estimate the remaining economic life of the building as the remaining physical life assuming that no periodic renovations will be performed. As there is no guarantee of those renovations, it would not be prudent to assume their occurrence. Thus, in the case of the 25 year old residential property which has received typical and routine maintenance, but no renovations, if the physical life expectancy of the building is 50 years, it is reasonable to conclude the building is 50% depreciated and the remaining economic life is 25 years. If, during the next year the building is renovated, a future appraisal is likely to report substantially less depreciation and a longer remaining economic life.
That conclusion may not be reasonable in a changing market.
Each property is different. And that's a good thing for us. It keeps us relevant.
George Hatch
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It's not just the general use that is at question here.
Real life example: I've seen a number of examples of 30-40 year old homes in average condition being demolished because of the prevailing trends in their neighborhood for bigger/better quality homes. Physical condition isn't a factor one way or the other in those decisions; it comes down to a "maximally profitable" question in the HBU analysis.
Real life example: I've seen a number of examples of 30-40 year old homes in average condition being demolished because of the prevailing trends in their neighborhood for bigger/better quality homes. Physical condition isn't a factor one way or the other in those decisions; it comes down to a "maximally profitable" question in the HBU analysis.
Ken B
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Even residential neighborhoods experience the basic neighborhood cycles of growth, stabilization, decline, and revitalization. It makes no difference if the setting is urban, suburban, or rural.
Market tastes and standards change, demographics change, areas are rezoned, permitted development densities change, McMansions replace workforce housing, roads are built, etc, etc, etc.
The only constant is change. Nothing is forever, everything changes.
Market tastes and standards change, demographics change, areas are rezoned, permitted development densities change, McMansions replace workforce housing, roads are built, etc, etc, etc.
The only constant is change. Nothing is forever, everything changes.
jay trotta
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George H; bingo !!
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