Documenting the depreciation method ??

[Glenn Redo]

C*t* mortgage seems to have certain (new) "hot buttons" they are looking for. When the appraiser includes the Cost Approach, the source of the cost figures must be include in the report. That part is easy enough. In addition, the appraiser must document the depreciation method (age/life or M & S are the depreciation methods I most frequently use). What do they mean by document and how in depth should I go.

 

[Elliott]

Glenn,
Well, I use age/life and replacement cost....so what do you
use? I just write it out...its a little vague, a little proprietary,
but if push comes to shove I can show the calculations.

elliott

 

[Glenn Redo]

Glenn,
Well, I use age/life and replacement cost....so what do you
use? I just write it out...its a little vague, a little proprietary,
but if push comes to shove I can show the calculations.

elliott

I use both too and always show the calculations, its the documentation part I was puzzled about.

 

[Restrain]

The documentation is exactly what it means. It can be measured from the market. You can use M&S. Whatever you are using, that is your source. As an example, if you use a flat M&S depreciation schedule, it should be compared against the market to insure that a) the effective age and overall life expectancy that you are using is accurate, and b) the depreciation is supportable from the market.

In my market, I found the M&S was relatively inaccurate, both in terms of replacement cost and in terms of depreciation. Therefore, I regularly extracted my reproduction costs and depreciation from the market, making a file for these items. That way, I developed my own, more accurate, estimate for the Cost Approach.

It's all going to depend on your market and what data is available for you. Remember, the older the home, the less accurate the Cost Approach is, and the higher the necessity of comparing your results against the market.

For example, if the market shows a value of $250,000 and the Cost Approach comes in at $182,000, you better go back to the drawing board,

 

[Mike Boyd]

IMHO, estimating the effective age of a single family residence is purely subjective.

 

[Brad Ellis]

Mike,

Unless you derive it from the market...


Brad

 

[Austin]

Fannie & Effective age

I was taught to derive effective age by estimating the accrued depreciation annual rate, like 20% depreciation with an age of 20 years='s 1% per year. The reciprocal of that is 100 year total economic life so the remaining economic life is 80 years and the effective age is 20 years. This is a methods of extracting the market's perception of market derived depreciation.

I just purchased Henry Harrison's new book on how to do the new 1004. Fannie Mae has stated according to this book that effective age is nothing more than the appraisers best guess. Whatever works. It also states that no longer does the remaining economic life have to be longer than the term of the loan. If they keep on compromising, will there be any appraisal principles left?:icon_eyecrazy:

PS: Maybe Fannie is adapting the spirit of sow 2006. Just write your own rules and go for it.

 

[Fred]

Since a summary report is supposed to summarize the “scope of work” and “procedures followed,” isn’t at least “stating” the (depreciation) procedures followed already required? BTW, “summarize the procedures followed” will changed to “summarize the methods and techniques” in USPAP-2006.

I think “effective age” is silly. There is no mathematical reason why using a scale of 1-2-3-4 wouldn’t work as well as EA’s of 5-10-15-20.

Also, why is observing and grading the condition of properties, “subjective?”

 

[xm72mhd]

For example, if the market shows a value of $250,000 and the Cost Approach comes in at $182,000, you better go back to the drawing board,

Is this another way of saying, "The value via cost approach is the value via the sales approach"? This might be true if you were almost 100% sure of the correlation of the effective ages of the adjusted comps with your subject.

I encounter the same dynamic that you do, finding that the market does not support use of the actual age in depreciation when the life factor published in M&S is used. Mostly I find a huge number of homes that the expected life is 2 and going on 3 times what M&S says it is without a lot of remodeling.

Where'd M&S get those life expectancy figures anyway?

Why not just use actual age and adjust the expected life instead of using the effective age? Seems to me that the market is saying this old house will last longer than 60 years. Maybe that is what effective age is, but it sounds better to me. Maybe the market says M&S is all wet when it comes to depreciation.

Placing how long a house will last aside for a moment, I remember a discussion awhile back where Steven offered information about an article that indicated that appraisers were actually using the sum of years method of depreciation to arrive at effective age. Others responded that appraisers use the straight line method. I detect that my market says there is some kind of exponential depreciation. The market seems to support the notion that depreciation is steep at first and then sort of goes into a glide for the nest 120 years (that's about as old as it gets here). What do you guys see in your markets?

So much for the exact point of this post. I'll try to get back there if I can.

 

[Austin]

Long Story Short

EDD:
Effective age is a point estimate in time. M & S studies reflect a trendline derived from actual properties over the life of the building. I think of it as A day in the life of Austin. I live one day at the time but I have lived a lot of days. My effective age today is about 25 but when I was 25, a long time ago, my remaining economic was longer. The insurance tables at the time said I would live to be 72. I may but a lot of my friends are dead and gone. So much for tables. After I pass, you can e-mail me my total economic life and we will see how well the tables worked out. :icon_smile: