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100 Yr Life In Depreciation

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Tejus

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Joined
Nov 1, 2002
Professional Status
Certified Residential Appraiser
State
Texas
In the recent "Effective Age" and "Depreciation, which is your preferred method" threads, a couple appraisers identified using a 100 yr life in age/life method. Richard C. has moved from 60 -> 75 -> 100 yr. Jim B. said the effective age / 100 is very close to the M & S figures.

I agree with them that 100 yr is an accurate life estimate. I've been using 60 yr for most SFR, but had to introduce a "fudge factor" because the calculated depreciation was so far from reality. I want to remove my "fudge factor" from my calculations and go with a more realistic life estimate. The 100 yr life works well in my market.

My questions is: Has anybody submitted a std appraisal for a typical SFR and identified a 100 yr life in their cost and age depreciation calculations? If yes, were there any questions from the client due to the higher than normal (e.g. approx 60 yr) life estimate?

Any and all comments are welcome.

muchas gracias.
 

Willie

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May 30, 2002
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Certified General Appraiser
State
Tennessee
Glad you asked this. I thought prior thread was interesting. This should be too. I haven't done it yet so I don't really know. I've always used the ones given by M&S but, as pointed out, they seem to not be realistic, especially on old construcion.
 
Joined
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Retired Appraiser
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Florida
Yes, I've used 70, 80, 100 years life expectancy with no questions. M&S tends to run pretty close here for new construction so I use the life expectancy that brings the older property into perspective for the individual sub market I'm in. That's barring any obsolescence issues. Most of those 50 year old houses are still going to be there another 50 years from now. That is, if mankind is still here. :blink:
 

George Hatch

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Jan 15, 2002
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Certified General Appraiser
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California
The way I see it, the big issue is not effective age, it's remaining economic life. Our clients don't care how old the structure is, they only care if the improvements are going to hold up throughout the life of the loan.

To me, the biggest difference between the appraiser estimating effective age and estimating remaining economic life is that the former deals primarily with the physical condition and normal functional obs, while the latter includes those elements and puts them into context of the external factors that most certainly apply. Specifically, the subject's market area. This is how a 100-year old home in below average condition can be worthy of a 30-year mortgage; and how a 30-year old home in average condition can be at the end of it's economic life span. Within their respective neighborhoods, the 100-year old property can be fairly estimated to have a remaining economic life in excess of the 30 years, and the 30-year old home can be fairly estimated to have no contributory value to that property (present a cost to cure, even). Their physical and functional attributes are placed in context by comparing them to the market activity in their neighborhood. Using a 'fudge factor' is neither necessary nor desireable.

Fortunately, the M&S method for calculating accrued physical and normal functional losses (based on the "Extended-Life Theory of Loss") is based on this concept. This explains how they can use a 55-year baseline and their depreciation table for an average quality home. Using the M&S method, the appraiser does not estimate effective age; they estimate remaining economic life, with effective age coming out as a residual. I would go so far as to say that an appraiser should not use the M&S depreciation tables without using the same equation that the table is based on for determining effective age:

Total Economic Life - *Remaining Economic Life = Effective Age

* As estimated by the appraiser

As an alternative, I think using a 100-year economic lifespan and dividing effective age (as estimated by the appraiser) by 100 is also a very reasonable method, based on our common experiences with old structures. The only problem you might run into is if you're relying primarily on M&S costs but using a different method for calculating loss; in other words, mixing your data sources and methods. When you go it alone, the burden of proof is going to be on you to back your method up with some data; when you use an industry staple, like M&S, the burden is on your accuser to prove that everyone else is wrong.


George Hatch
 

Richard Carlsen

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Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
Alan;

Not a word from any lender to date. Fact of the matter is that most of them don't understand the Cost Approach in the first place.

Quite frankly, the age used 60, 75, 100 or even 10 years is sort of irrelevant. The important number how the effective age (purely subjective in the eyes of the appraiser) relates to the total years used in the Age/Life Method.

I used to use 60 years with an Average house having an effective age of 15. The reason for my going to 100 years is that the effective age is generally closer to the actual age of the house. Now an Average house has an effective age of 25 years.

And George is right; what they are most concerned with is the remaining economic life. That is the critical measurement they look at.
 

Frederick R. Ruffell

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Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
I agree with George and Richard. I just completed a set of units (1025) that was built in 1890's and used a 150 year Total economic life. This baby had been totally restored. This structure has already survived 108 years +/- without the benefit of a modern foundation (which it now has) and other modern structural improvements and 150 years was probably too little!! :eyecrazy:
 

Mountain Man

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Jan 15, 2002
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Certified General Appraiser
State
Georgia
Iv'e used anywhere from 40 to 100 years depending on quality of construction (was it truely built by the owners?? :huh: :eek: :rolleyes: ) But I have also have use 5 years..... "tear downs" or "Bulldozer Bait" in a crazy market. ;)
 

Terrel L. Shields

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Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Pam said
Most of those 50 year old houses are still going to be there another 50 years from now.

Yes, but how many will be in the same configuration and with the same systems as today? My girlfriend lives in a 100 year old house, but it has been altered...structural repairs, central heat and air replaced a steam heat system with old radiators. New windows, kitchen remodel, new siding, you know major repairs, not cosmetic maintance....

Each remodel resets the clock back (increases the remaining life and keeps the building current with modern tastes and requirements (like air conditioning in the south) I think this is where I am divergent to other parties who call for total lives of 100 or more. You are assuming major remodels are mere "maintenance" while I am assuming such remodels change the actual building "clock". That was the way I was taught from the classic books on the subject.

Had that old dwelling been painted over only, roof repaired only, was still ventilated by double hung windows, had no modern kitchen, wood cook stove, fireplaces and steam heat, softwood floors, plaster walls, claw foot tub and standing lavatory, ...well, what would it really look like and what would be its effective age? I would argue it would have been abandoned long ago and razed.
 

Keith

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Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
Three years ago I was requested by the appraisal board to submit three sample appraisals before I could get certified. At the time we were using 100 yr economic life.

The person reviewing my reports called me concerned that 100 yrs was inaccurate. I had to promise to stop using 100 yrs before he would approve my reports! I now typically use 75 yrs, but change it for certain types of properties.

If the home is over 20 or 30 years old, I typically omit the cost approach. The cost approach simply isn't applicalbe in my opinion.
 

jtrotta

Senior Member
Joined
Jan 16, 2002
Terrel,
would have to agree; once improved again it takes on a new life. I would think that it could be determined in everyone's own area the real life of a structure, with no improvements. Various periods of time will reveal the quality of construction for those various ages of structures; older structures (Post & Beam and/or Timber Frame) to have a great quality about them for endurance; once improved again they take on a whole new life. In our area we have dwellings that are 300 years +/- in age and may remain standing another 300 years, who knows :question: - so will the 30 year mortgage run the test of time, possibly.

the other end of this scenerio is also true, there are dwellings less than 50 years old that have notable problems, I believe it "depends" on the builder. One thing is defintely obvious, older builders, built structures with a lot more pride & craftsmanship, than most of the contractors of the past 50 years.

all and all there are a lot of basics that play a very important roll in the house and the basic rules apply; the "foundation" is perhaps the most important part of the entire project; and it all starts with the ground. The ground where the foundation will be placed is most important (virgin ground) for a solid base, with well designed footings and drainage are basic for the "test of time dwelling".

Good Luck to all

:ph34r:
 
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