Age Adjustment Formula

[Kyle77]

I know of an appraiser that uses the following formula to calculate age adjustments when little data is available ----

Sales price - land value / total economic life X 0.40 (depreciation) X differences in years for comparable

Is it just me or does this formula seem.... ummm...pretty whack?

 

[Randolph Kinney]

I know of an appraiser that uses the following formula to calculate age adjustments when little data is available ----

Sales price - land value / total economic life X 0.40 (depreciation) X differences in years for comparable

Is it just me or does this formula seem.... ummm...pretty whack?

The formula is whacked.

 

[Michigan CG]

Yes it is whack.

The correct way to do it is sale price minus current land value = contribution of improvements (COI). Figure cost new, subtract COI from cost new and you have TOTAL depreciation.

Now you have to figure out what is physical, functional and external. Functional is hard to figure sometimes.

I know that external in my market is 20%-25%.

House built in 1990 sells for $160,000. Land is worth $20,000, COI is $140,000.

Cost new is $240,000. Minus external (20% -- $48,000). Remainder is $192,000 thus leaving $32,000 for functional and physical. Let us say there is nothing functionally wrong with the property then you have $32,000 in physical which is 13% or 0.67% per year.

 

[Terrel L. Shields]

Sales price - land value / total economic life X 0.40 (depreciation) X differences in years for comparable

10 year old house sells for $200,000 on a $50,000 lot....
Your subject is 15 years old...

$150,000/ say, 50 years = 3,000/year

And you are saying the .4 is the depreciation or a fixed .40?

3,000 x .4 = $1,200 x 5 = $6,000 adjustment.

hmm.
Why wouldn't a mechanical straight line depreciation just be

5 years difference and 50 years total life = 10% and 10% of $150,000 be $15,000? I don't understand the 40%... (.40)

 

[Kyle77]

Yes it is whack.

The correct way to do it is sale price minus current land value = contribution of improvements (COI). Figure cost new, subtract COI from cost new and you have TOTAL depreciation.

Now you have to figure out what is physical, functional and external. Functional is hard to figure sometimes.

I know that external in my market is 20%-25%.

House built in 1990 sells for $160,000. Land is worth $20,000, COI is $140,000.

Cost new is $240,000. Minus external (20% -- $48,000). Remainder is $192,000 thus leaving $32,000 for functional and physical. Let us say there is nothing functionally wrong with the property then you have $32,000 in physical which is 13% or 0.67% per year.

Thanks very much for the formula. Can I ask how you adjust the comparables? Do you use annual depreciation rate X replacement cost X difference in years?

 

[Mile High Trout]

Great info CG, although big city markets are so price manipulated the extraction of new vs current is negligible sometimes. price finds a way of staying constant if not increasing when unobjective motivations are applied by interested parties.

On a related note, the AI ready appraisal scrubbers don't have the first clue about the relevance of EA vs actual age and are a major hassle to work with. This is a symptom of some tech geek who's never done a day of appraising putting together the scrubber product.

For instance, one mega AMC has a scrubber protocol which states the EA must be in range of 1 unit trends figures. It demands bracketing in Alamode of the appraisers opinions (both) actual and effective against 1 unit trends. (although only actual appears in the report and effective is auto carried over to cost approach). That's one technical spiff I could do without.

That's an absurd approach if dealing with a thoroughly remodeled property! That method would force me to apply uber depreciation to a 100 year property under EA, even if the property is tiznits brand new in terms of repaired foundation and material quality.

The scrubber would force me to increase my depreciation in the cost approach because my opinion of EA is below or less than the actual data reporting of actual ages of neighborhood homes. The order manager scrubber tool there specifically states to bracket these numbers. It's not just AMC incompetence which is causing errantly low valuations. How many appraisers have followed this errant guidance and then increased the depreciation. Then how many appraisers feel these numbers should match, and then decrease market value to match? It's a viscous circle caused by implementation of poorly tested procedure. I prefere the addenda workaround and otherwise improper change of 1 unit trends to provide the bracketing myself.

If the home is remodeled and practically new, why should my EA bracket the actual ages in the 1 unit trends? Corny at best. What I end up doing is falsely increasing the 1 unit trends low age data reporting to stop the scrubber stall. (because this particular AMC WILL NOT allow the report through to even get to the review stage unless this bracketing occurs). Then I've got to write a lengthy addenda paragraph stating the actual 1 unit ages, my opinion of subject ages, and reconciling the reason why this data does not appear correctly in the 1 unit trends box. It's not my fault!

 

[Kyle77]

10 year old house sells for $200,000 on a $50,000 lot....
Your subject is 15 years old...

$150,000/ say, 50 years = 3,000/year

And you are saying the .4 is the depreciation or a fixed .40?

3,000 x .4 = $1,200 x 5 = $6,000 adjustment.

hmm.
Why wouldn't a mechanical straight line depreciation just be

5 years difference and 50 years total life = 10% and 10% of $150,000 be $15,000? I don't understand the 40%... (.40)

I don't either. I ask what it meant and was told depreciation

 

[Mile High Trout]

Let's face it, this is yet another subjective adjustment.

TEL and REL are products of the marketplace and long term acceptance of area popularity by buyers. One could scarcely predict the future and say with certainty that the area will or will not increase in popularity, thereby confirming trend estimates regarding weather or not the overall market expectations would support remodeling and renewed price valuations.

Some markets get hot, others get cool. That has a lot of influence towards both the TEL, and REL by way of market expectations which promote remodeling and good maintenance or not. On top of that the city and employment factors can influence those things as well. 50 years rel, 60 years rel, 70 years rel, who could know for certain?

Flint Michigan vs SanFrancisco is probably a good example of my point. Who would have though one one fall and the other would fly more than 40 years ago? It can be subjective all the way down to simple and local boundaries.

 

[PropertyEconomics]

Let's face it, this is yet another subjective adjustment.

TEL and REL are products of the marketplace and long term acceptance of area popularity by buyers. One could scarcely predict the future and say with certainty that the area will or will not increase in popularity, thereby confirming trend estimates regarding weather or not the overall market expectations would support remodeling and renewed price valuations.

Some markets get hot, others get cool. That has a lot of influence towards both the TEL, and REL by way of market expectations which promote remodeling and good maintenance or not. On top of that the city and employment factors can influence those things as well. 50 years rel, 60 years rel, 70 years rel, who could know for certain?

Flint Michigan vs SanFrancisco is probably a good example of my point. Who would have though one one fall and the other would fly more than 40 years ago? It can be subjective all the way down to simple and local boundaries.

Other than development of the cost new .. how is this subjective? Michigan CG makes note that you have to deduct functional or external in order to arrive at physical, and while I agree with him in principal, if done properly the method will measure all forms of deprecitation which is the reason for doing the analysis.

For example, during the RTC days I measured depreciation from four apartment units which calculted to 4.2 - 5.1% annually with strong support for a conclusion of 4.5% annually based on these four sales.
Historical measurements by our office suggested 2 - 2.5% annually was typical physical depreciation. Based on these comparisons we were able to determine 2 - 2.5% of the market depreciation at the time of our measurement of the RTC sales was economic depreciation (now called external for appraisal purposes).

I much prefer measurement on an annual basis rather than a total percentage because it allows you to more accurately measure depreciation from all forms from your comparable sales, application of depreciation for your subject, and calculation of age adjustments from the market.

I dont think its overly subjective at all ... frankly it is a method that nearly no one uses today because it takes a bit of work ... and we all know many appraisers simply wont put in the work it takes to have an accurate report ... or at least that has been my experience from reviews.

 

[Terrel L. Shields]

Can I ask how you adjust the comparables? Do you use annual depreciation rate X replacement cost X difference in years?

You can explore the weaknesses and strengths of the Cost approach and derive a market based depreciation with this. This is the link
http://www.workingre.com/workingre/cost-approach-diff-view.htm
and these lecture notes
http://www.aaec.ttu.edu/faculty/phijohns/AAEC%204303/Lecture/notes/ACCRUED.htm

http://www.aaec.ttu.edu/faculty/phijohns/AAEC 4303/Lecture/notes/4303_09.pdf

http://www.real-analytics.com/FINC_674/Cost approach.pdf

and this is another source of info
http://cama.wyoming.gov/Education Documents/Depreciation Workshop 12-6-2006.pdf