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Depreciation Info

Discussion in 'General Appraisal Discussion' started by Ramon A. Olivarez, Jul 29, 2005.

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  1. Ramon A. Olivarez

    Ramon A. Olivarez Junior Member

    0
    Jan 24, 2003
    Professional Status:
    Certified General Appraiser
    State:
    Texas
    Guys, I need some info. I am doing research on residential depreciation. I am looking for a book or something that will explain depreciation a bit more fully. I understand the term and the different kinds there are. Homes are depreciated according to effective age or physical condition. I am looking for information that would show, for example, that a house at 70% typically has a bad roof, bad trim, at 50% the house is not livable but repairable, at 30% the house is basically a shell in need of a complete remodel. I hope I am making this clear, I apoligize if I am not. The chart should have something to back up what loss is incurred at certain stages of depreciation. I am doing some research and would like your help. Any books or references that you may have would be appreciated.

    Thanks!
     
  2. Mike Boyd

    Mike Boyd Elite Member

    0
    Jan 18, 2002
    Professional Status:
    Retired Appraiser
    State:
    California
    In the URAR, at the top right corner on page 2 you are required to explain your source, or how you calculated the reproduction cost and depreciation. I type in: "Marshall Swift Cost Manual used as a guide to estimate reproduction cost and depreciation." (We are talking about PHYSICAL depreciation.) Yes, The Marshall Swift manual shows you how to determine the physical depreciation percentage based on its effective age. So, my recommendation is, if you do not subscribe to Marshall Swift, do so. Keep in mind that I said "Used as a guide." If there is extraordinary depreciation....say, a bad roof that absolutely must be replaced, then you might add your estimated cost of the new roof....on top of the ordinary depreciation. Remember, any depreciation reflected in the cost approach that exceeds its otherwise effective age must also be reflected in the market analysis grid. Maybe not dollar for dollar as that would depend on market reaction. I am sure other appraisers use other methods, but this has worked for me for almost 25 years and 20,000+- appraisal reports.
     
  3. KD247

    KD247 Senior Member

    0
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Hi Ramon,

    Interesting topic! How about reporting back to us with your findings?

    Many appraisers have different beliefs regarding depreciation, but there are few general principles that hold up in all circumstances.

    In terms of finding accurate milestones for stages of depreciation (like, at 50% the house is not livable but repairable), it would be interesting to see if there is some concensus here. I have a feeling that if you do find any published guidelines, they're not going to be much more accurate than the type of guidelines that tell us that a kitchen remodel returns 120% of the cost, where a pool only returns 50%.

    Marshall and Swift might be as accurate as they get, but often it's tough to correlate even those numbers with what we see in the market. Buyers and Sellers aren't always rational, or even consistent, in the way they react to depreciation.

    There are plenty of books with general theory regarding depreciation, but I've never seen one that attempts to reconcile depreciation theory and what we see in day-to-day practice.

    Just out of curiosity, why are you doing the research?
     
  4. Red Blumenstock

    Red Blumenstock Sophomore Member

    0
    Jan 16, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Florida
     
  5. Farm Gal

    Farm Gal Elite Member

    0
    Jan 14, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Nebraska
    Ramon:

    I don't think there are very good resources for what you are seeking... One place to start looking is contacting your local building departments (and insurance company contacts) and asking how they develop 'percentage of loss' for permit and insurability factors. Certain jurisdictions will have this codified... Others use 'opinion' from their building or fire department personell.

    You would also need to define what you are seeking: economic viability (percentage of value loss) versus physical damage as a function of component percentage of damage.

    In terms of function, we have watched uninhabited homes deteriorate over logn periods of time. Local observations and changing economic realities form part of my view of "what is" and "what isn't recoverable" from a physical deterioration in any geographic area.

    Habitibility is an economic and personal choice matter for some folks... so your economic market area has impact also. High end teardowns replaced by ever larger mcMansions are economically unviable according to highest and best use... (improvements returning more to the land)... but were perfectly nice homes by other folks standards.

    In the harsh midwestern clime, it really doesn't take long for a unmaintained home to reach a point where it has lost virtually all possibilitiy of economically viable reclamation... I think a lot of the 'percentage of depreceiation over time' is climate and locationally (value) dependant! Desert homes tend not to rot or rust or mold away...

    As long as the foundation, and most of the framing is still sound, some real wrecks may be recoverable. I have seen folks take long abandoned properties and bring them back. With the price of lumber increasing exponentially, some properties which might have been considered bul-dozer bait may be more attractive despite their other flaws!
     
  6. Don Clark

    Don Clark Elite Member

    12
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Virginia
    B) Good point Red :beer: Ramon, the best source is "Experience". Assuming that you know how to estimate depreciation, the theory is, estimated cost to cure equals the amount of depreciation. Also, in addition to M & S most basic appraisal text demonstrate how to estimate depreciation either by straight line method or observed condition method. I would also suggest the M & S Repair and review quarterly.
     
  7. KD247

    KD247 Senior Member

    0
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I'll throw out some half-baked ideas and see if anyone can correct them or add to them:

    One challenge in figuring stages of physical depreciation is that different building materials deteriorate at different rates. So every type house will deteriorate in different patterns and every component will deteriorate at different rates.

    Some components are expected to deteriorate rather quickly and must be continually repaired or replaced, like paint, floor coverings, roof, trim, hardware, etc. The term deferred maintenance usually deals with repairs or replacements that are either due or overdue.

    Other components are expected to wear out, but their repair or replacement is usually at significant cost (or impractical). These components would include plumbing, electric, siding, cabinetry, paving, etc. These are the components that are probably most responsible for the property's effect age are typically replaced as part of a general renovation of the property.

    Still other components are so long-lasting that they are considered to have almost infinite lives. The only ones I can think of are masonry, and perhaps framing (if originally of decent quality and if protected from the elements). When there are problems with these components they are usually thought of as defects as opposed to normal aging.

    Anyway, to determine percentage of depreciation you would need to examine different things for each different type of house. A masonry house with a slate roof might be impractical to renovate and have only a year or two left, even though it looks perfect. A house with inexpensive siding and roof materials might look like it's ready for the scrap heap, when it would only take a few thousand dollars to renovate.

    In the Cost Approach, we need to resort to wide generalities and massive assumptions in order to explain a complex situation in simple terms. We're probably lucky that most of our conclusions aren't really testable.

    I think Don might have it right. With the millions of variables involved, experience is probably the best tool in making decisions regarding physical depreciation. Thank goodness; maybe this is another skill that can't be handled by a computer or a clerk in India.
     
  8. DTB

    DTB Elite Member

    31
    Jun 11, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    Surprised the Skippy Police haven't come after you yet. That's 16 reports a week for 25 years straight! :rainfro:
     
  9. Mike Boyd

    Mike Boyd Elite Member

    0
    Jan 18, 2002
    Professional Status:
    Retired Appraiser
    State:
    California
    Point taken. Red. I know better, just wasn't thinking.
     
  10. KD247

    KD247 Senior Member

    0
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Or the IRS, to confirm that you're showing an average of $320,000 per year for the last 25 years!
     
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