Effective Age-Condition

[PropertyEconomics]

PE,
When I use Marshall & Swift all of my calculations are easily verifiable. I would think that underwriters are not very familiar with your method. Do they ever ask for calculations?

Mark its in every commercial report I do ... full and complete ....
Do you put M&S pages in all your reports and how do you back up the data with supporting documentation .. its only numbers on a page. Do you know where they came from or how applicable they are to your market?

You appear to be under the assumption that it is only used for the cost approach. Can you see other applications for use of market derived depreciation?

 

[PropertyEconomics]

The most important part of the adjustment process is that the ages given are relative to each other. Your method is doing this and probably works just fine. If I may suggest try fine tuning it a bit. Divide your physical depreciation (in the cost approach) by the number of years of effective age to get a yearly effective age adjustment. If this number is $4000 and you estimate that one house has $8000 more in adjustments then you know that they have and effective age difference of 2.

This is backing into a number Mark. That isnt market derived. Its using your subject cost as the benchmark for the age adjustment. You cant do that. All houses have differing costs and features. If those are not considered in the adjustment .. the adjustment is not correct.

 

[Jo Ann Meyer Stratton]

Effective age and condition are the same thing. Definition from the 1976 edition of Appraising Real Property by Byrl Boyce & William Kinnard. "Effective age is the age in years indicated by the condition and utility of a structure." Adjustments for both is double dipping.

Effective age/condition is the curable depreciation in the Cost Approach. Any remodeling, updating, renovation, cosmetic items would affect the condition.

Actual age is the incurable depreciation in the Cost Approach. Actual age is important because it represents the style, materials, design, amenities of that specific time period. It also represents the "bone" structure of the building. In a limited market area were older ranch style homes compared to new contemporary homes would warrant an adjustment for actual age--regardless of condition.

 

[Mark to market]

Mark its in every commercial report I do ... full and complete ....


What about your residential appraisals? Do you use M&S or your actual age method to compute depreciation


quote Do you put M&S pages in all your reports and how do you back up the data with supporting documentation .. its only numbers on a page. Do you know where they came from or how applicable they are to your market?


Verifiability is easily ascertained from quality rating.
Over the years I have found them to be very reliable. Even to the point of telling when our appreciation rate was getting ahead of itself.

 

[Mark to market]

This is backing into a number Mark. That isnt market derived. Its using your subject cost as the benchmark for the age adjustment. You cant do that. All houses have differing costs and features. If those are not considered in the adjustment .. the adjustment is not correct.

Wrong PE,

The cost approach provides a very accurate rate for the subject and a good point for yearly adjustments for that value and age range of home, however the comps are adjusted on their merits.


If I recall right your method uses actual age to establish depreciation, it often uses total life of over 100 years. How you fill out a fannie mae form cost approach with those numbers and not get questions from the underwriter is beyond me.

 

[Mark to market]

Effective age and condition are the same thing. Definition from the 1976 edition of Appraising Real Property by Byrl Boyce & William Kinnard. "Effective age is the age in years indicated by the condition and utility of a structure." Adjustments for both is double dipping.

Effective age/condition is the curable depreciation in the Cost Approach. Any remodeling, updating, renovation, cosmetic items would affect the condition.

Actual age is the incurable depreciation in the Cost Approach. Actual age is important because it represents the style, materials, design, amenities of that specific time period. It also represents the "bone" structure of the building. In a limited market area were older ranch style homes compared to new contemporary homes would warrant an adjustment for actual age--regardless of condition.

Thanks, Jo Ann, great definitions. It sounds like you might use actual age to encompasse functionality aspects such as raised or open ceilings, smaller bedrooms, less bathrooms, etc

 

[Roger R. Patzold]

I have been trying to find a class on this subject, with experienced appraisers attending for years now and no luck.

I think what I think is right but I am not willing to bet any money on it yet. Tomorrow I might be willing to.

The following are some opinions that are good today. Tomorrow they might not be.

The cost approach on page 3 of the URAR is economic life, which is different from effective age. Many appraisers I have discussed this with tend to treat remaining economic life and effect age as part of the same theory. I think that is probably wrong.

Where did economic life come from? Especially the idea that the original economic life should be 60 years or any particular number of years. Original economic life has two factors: 1)Quality of construction 2)External influences.

A well built house without any negative exteranl influences should have an infinite original economic life. About 15 years ago I appraised a house built in 1890. Said house had been completely gutted and everything except the wood timbers, planks, and the foundation(Bricks) had been replaced or new and current equipment and built ins had been installed. All of the remodeling had been done within the previous 24 months. The only negative was a freone had been allowed to get on the wood exterior behind the AC unit and the paint was not sticking like it should.

Example: A brand new two story brick veneer home was built a couple of years ago in Clevealnd, Texas in a block, on a street that has all vacant lots going commercial. The exterior observation of the dwelling indicates it would be difficult to convert the floor plan to commercial without major reconstruction. IMO the original economic life of the structure could be zero as the structure's H&B use is in serious conflict witht he H&B use of the raw land.

IMO effectife age should be the actual age adjusted for maitenance and updating or remodeling.

A 10 year old house with the original composition roof can not have the same effectife age as the identical 10 year old house next door that has just had it's composition roof replaced.

IMO both houses should be considered to have an effective age of 10 years. One should have a condition adjustment for the older roof.

IMO condition has limited or no effect on effective age until condition nears or reaches the point that the house is not livable.

I agree with several who pointed out that effective age is frequently used to tweak the appraised value.

Someone please tell me how a house of any age over 30 years can have an effective age of 25 years and remain livable. How can a 5 year old house have an effective age of 3 years? I have seen and/or heard both comments. Sounds like tweaking to me.

As described in the 1890 era house above. Remodeling or updating as some call it can theoretically eliminate any amount of age.

I agree with one of the earlier posters, please advise how to derive effective age from the market. I think the remaining economic life can be drived from the market as in the new house in Cleveland I described above. IMO that new house could probably be proved to have no remaining economic life at it's inception.

Another variation is two houses side by side that were built 60 years ago. One has been remodeled/updated with everything new except timbers, planks, and foundation two years ago but has been poorly maintained since the remodel. IMO effective age would be 10 or less. I just don't like going below 10??? Condition would be poor and require a large adjustment.

The other has never been remodeled/updated but has received exceptionaly maintenance throughout it's life. IMO effectove age could be well above 10 years and require an adjustment but condition would bed average and require no adjustment.

This last comparison is extreme but is being used to attempt to point out the difference IMO between effective age and condition.

The URAR says actual age. IMO that requires an analysis of any remodeling/updateing with a resulting adjustment. However, to do that properly the appraiser would have to do the same analysis of the sales used as comparables.

I base my determination of effective age of the comparable sales on observation from the street, conversations with realtors, conversations with anyone else who will discuss the issue, and my own experiences in the area. This part of the competency requirement.

Now that I have gone completely in a circle please comment.<><

 

[Jo Ann Meyer Stratton]

The book I quoted was has an actual copy right date of 1984. Another textbook that is copy righted 1977--Property Assessment Valuation by the International Association of Assessing Officers has the following definitions.

Effective Age--Effective age is the number of years indicated by the condition of the building. If a building has had better than average maintenance, its effective age may be less than the actual age; if there is has been inadequate maintenance, it may be greater. A fifty year old building may have an effect age of twenty five years due to rehabilitation or modernization.

Remaining economic life--Remaining economic life is the number of years from the date of the appraisal to the date when the building becomes economically valueless.

Total economic life--The total economic life is the estimated period over which it is anticipated that a property may be profitably used. This may be described as the sum of effective age and remaining economic life. Total economic life can never exceed, and is generally shorter than the physical life of the property.

Another text book going back to 1946 and updated several times up to 1983--A Guide to Appraising Residences by H. Grady Stebbins, JR.

Effective Age: This is the "age of a similar structure of equivalent utility, condition and remaining life expectancy as distinct from chronological age; the years of age indicated by the condition and the utility of the structure". Effective Age may be greater or less than actual or chronological age. It is measured in economic terms as an indicator of diminished utility.

Economic Life: This is "the period over which improvements to real estate contribute to the value of the property".

Remaining Economic Life is Economic Life minus Effective Age.

All the references have one common theme--condition and effective age are almost synonymous. Condition determines effective age, effective age represents condition.

So now we know why the new forms have the words Actual Age in the grid. Condition and effective age are the same thing so one adjustment only. Actual age is a fact and there may or may not be a market reaction to the differences in actual ages that has nothing to do with condition.

A 1890 house that has new roof, new plumbing, new electrical wiring, restored woodwork and floors, etc, etc, etc is in very good condition and either a minus or plus adjustment would be necessary depending on the condition/remodeling/renovation/restoration of the comparables. It however remains an 1890 house with the floor plan, layout, bone structure, etc, etc, of the 1890s--therefore if one of your subjects is a fairly new house within the past ten to twenty years there would be an adjustment for the difference in the actual/chronological age based on market reaction to those differences that has nothing to do with condition.

 

[Terrel L. Shields]

condition and effective age are almost synonymous. Condition determines effective age, effective age represents condition.

So now we know why the new forms have the words Actual Age in the grid. Condition and effective age are the same thing so one adjustment only.

The new forms for actual age are better indicators. In the old form, a lot of instructors taught that accrued depreciation estimated from similar sold houses (your comps usually) reflect effective age as derived in the formulas above. The "Condition" adjustment was for short term curable items that were different from the comparables.
This was particularly true when you saw older homes selling FHA and those items were required to be repaired. The houses sold for more than non-FHA homes because the non-FHA were in "as is" condition. Therefore, items like missing handrails, broken window or non-functioning heater were "cured" in an FHA sale, were "condition" items in the "as is" appraisals. I think that is a sensible approach.
In the case of older homes like above, both FHA and non-FHA sales were homes that have went thru numerous cycles of remodeling and updating. In the small town I am near, the older houses were not electrified nor plumbed until the 1920's. First upgrade. Then many were added on after WWII for more room for the boomer children. Porches were enclosed, rooms added on, bathrooms added... Now many of those have undergone extensive rehabilitation. The picture shows 3 bump outs from the original dwelling that are a bedroom closet, and bathroom. Figuring an effective age is simply going to have to rely upon an appraisers "judgment and skill" and if you are going to do it by math, the comps better be good and its more important to treat each comparable alike (uniformly) than to worry about whether its 30/60 or 45/90...50% is 50%.

 

[Elliott]

I once did a house with an inside privy. HOs love to upgrade.
I always remember when satellite TVs first came out....lots of huge
$3K dishes next to single wides and now all of them are good at
catching leaves.

Pick your comps well and you don't have to worry about making big EA
differences.