Adjustment for age

[jeyuhas]

I agree that market reaction to age should be the method for making an age adjustment. I am not a fan of the cost approach, especially on older homes (subject was built in 1987). I did not ask how the review appraiser arrived at the age adjustment. Now for the details on the subject property. The property is on one acre of land, is a five level home with 4268 sq ft liveable, has a pool, has a 1792 sq ft guest house and a 1568 sq ft garage/shop area. Land value adjustments were supported by land sales and are not an issue. The search area was sufficient for this problem. The home is not considered overbuilt for the area, just no sales of comparable properties. The comparables used were 20+ years newer with much less exterior amenities (guest house, etc.), and were considered the best and most similar overall comparables to subject. How can an age adjustment be extracted when so many other variables are involved? This is a minor issue in this review, but one that bothers me since I was unable to extract a value for age. Personally, I feel that an age adjustment cannot be extracted but did not want to argue with the reviewer.

 

[CoryG]

Hi.

I am of the opinion that especially with older dwellings, a more meaningful adjustment is made with effective age.

I estimate the effective age of the subject and the comps using the following criteria:

chronological age
condition
extent of updates (minor) or renovation (major)

The result is a market driven adjustment regardless of the actual age of the subject and comps. This works well with very old dwellings where the extent of updating matters the most and the chronological age has very little market impact (Historic houses for example).

Corey

 

[CANative]

Market rent for 1-5 year old 1300 3/2's = $1300.00
Market rent for 15-20 year old 1300 3/2's = $1100.00

Monthly rent difference $200
Gross income per year ($200 x 12) $2400
Less 5% vacancy and collection loss - $120
Subtotal $2280
Less operating expenses (35%) - $798
Annual income attributable to age difference $1482
Capitalized at 9% $16,467

Roughly $1,100 per year for for 15 year difference if you wanted to do it that way.

 

[Elliott]

Here's how I do it. Think 60 year economic life for a
new house. How does the market react to a new house,
well of course it has 0% depreciation. How about a 6
year old life, maybe 5%, or an effective age of 3 years
(3/60). Things aren't new, but it isn't linear in those
early years, the HO even cleans the gutters and
mops the floors.

In the middle years, it starts to increase as some of the
more short lived items depreciate (carpeting and stuff
like that). The markets reaction is, hey, this isn't a new
house and were going to have to replace these items.
So at 15 years, the house may have an effective age of
9 years (9/60 = 15% depreciation).

Here's the test, and where the 'appraising' part comes into
the process. When your doing appraising your testing
this theory of effective age and depreciation. So you
develop a sense of how the market is reacting to physical
age and marketability. When the market was zooming a
few years ago, I was routinely saying a house with an
effective age of 12 years was being treated by the market
as an effective age of 9 years....but those days are in
the past.

Hope that helps.

 

[Fred]

Here's how I do it. Think 60 year economic life for a new house. How does the market react to a new house,
well of course it has 0% depreciation.

Zero physical depreciation. Why not just say you are assuming cost is value?

 

[Thomas Fiehler]

Elliott-I have a question about your example. What would the typical updates be on a 6 year old house to reduce the effective age to 3 years? Around here, if it is a 6 year old house then its EA is 6. I am reviewing a report on a duplex and the appraiser made estimates as to the effective ages of the comps when they don't list the actual age but have "guestimated" at their effective ages. That doesn't make sense to me. Maybe someone could comment on how that is arrived at. (Very little information listed in MLS as to remodeling/updating)

 

[KenRossman]

Too lazy to rethink a detailed response, I cut/pasted from one of my prior posts...

Many appraisers confuse effective age and condition.

Others say adjusting for significant differences in both effective age and condition are double dipping.

IMNSHO, they are two different line items because they represent two completely different concepts.

Lets say you have two identical 1960's homes sitting side by side...

#1 has a 25+ year old roof, 40 year old boiler, 15 year old hot water heater, 40 amp "fuse" electric service, original kitchen and baths, original wood windows with wood storms and screens and original asbestos shingle siding. It has been impeccably maintained. It is very clean and in very good condition with an effective age of say 25 to 30 years+/-.

#2 has a one year old architectural grade roof, two year old boiler and hot water heater, 200 amp electric, three year old kitchen with cherry cabinets and granite counters/floors, two year old marble tiled bathrooms, recent Pella insulated windows and doors, five year old vinyl siding. The owners have lots of money, but are slobs... The carpets even though only a few years old are disgusting, the kids have written all over the walls, it is badly in need of decorating, etc. It is in below average condition, in spite of it's relatively low 5 to 10 year effective age.

These two homes require two different adjustments... One for condition, the other for effective age...

Adjusting for only chronological age and condition could easily lead to erroneous results.

My 2 cts...

 

[Mike Garrett RAA]

And we do all of that for, say, $300 on average?

60 year life expectancy? Many of the houses I deal with are 100 years old and still have a remaining economic life of at least 40 years.

Effective age on the comparables? We you in them? Do you know all of the updating or renovations?

 

[Elliott]

Market judgement and experience determines the effective
age, you and the market. I could use 50, 60, 80, or 100 years
for total economic life, wouldn't matter.

 

[moh malekpour]

Have you ever seen a 60 years old person to be healthier than a 15 years old person?

The old man is healthier because of healthy genetic DNA, eating right food, doing physical exercise, no drinking and drugs and running marathon.

The young guy has a genetic DNA for type 2 diabetes, is obese, over weight, with high blood pressure and cannot walk a mile.

The old man may live another 30 more healthy years. The young kid may not last to the age of 30 if doesn't get a major treatment and surgery.

The same thing is true about an age and condition of a home. You got to find out what is the gene in people and what is the foundation and quality of constructions in homes. Then you got to see what has been a life style for people and what has been the maintenance, upkeep and upgrade for homes.

You may see that a 10 years home has been aged like a 20 years home. conversely, you may see a 20 years old home that you think it is 3 years old.