Economic Life

[Jeff Horton]

The old black art of Economic Life of a house. Just curious what most of you figure is the Economic Life of an average house?

Reason I ask is that we have typically used 50 0r 55 years on most homes. Marshall and Swift CD I use will use a 52 year life if you leave it a the default settings. I recently did one in fair shape and used a estimated effective age of 25 years, leaving 27 years of Economic Life. Lender wants 30 years and I don't think I am good enough to say this house doesn't have 30 years life left. So it left me looking at this and scratching my head and wondering what others use.

 

[Mountain Man]

It depends on the highest and best use as well as quality of construction. For new construction, sometimes 50-60, sometimes 60-70, sometimes 80+.
In areas transitioning to commercial, or where 10+- year old lake front homes are being razed, I've noted they have less than one year of remaining economic life. Now THAT makes lenders REALLY happy! LOL

 

[Fred]

Lender wants 30 years

Just a wild guess: 30 years is the length of the mortgage.

 

[Pat Butler]

We live near a city where the majority of downtown houses are near 80-90 years old and still doing fine. Unless the HBU changes they'll still be sitting there for many more years. Economic life assumes that the property is still being maintained and as long as property values are increasing then it makes sense to keep maintaining some of these older houses.

 

[CANative]

Just use a range that includes 30 years. What difference does it make?

Is this for FHA?

 

[Elliott]

I like 60, easily divided, used for compass directions and time.
I don't think it makes a dimes worth of difference, so long as
you know what your doing and how to relate it to effective age
in a consistent way that makes it observable by the appraiser
in the market.

If you want to as an exercise, you can line up the costs of different building
components and how long they last (market) until they are replaced,
come up with a dollar weighted average, and I bet it would
come close to 50 to 70 years.

 

[incognito]

I like 60, easily divided, used for compass directions and time.
I don't think it makes a dimes worth of difference, so long as
you know what your doing and how to relate it to effective age
in a consistent way that makes it observable by the appraiser
in the market.

If you want to as an exercise, you can line up the costs of different building
components and how long they last (market) until they are replaced,
come up with a dollar weighted average, and I bet it would
come close to 50 to 70 years.

I would have to disagree...

Economic life and remaining economic life are not some arbitrary numbers, and they have very specific definitions, and it differs completely from physical life and remaining physical life.

REL is generally defined as the estimated number of years that the subject improvements will contribute at least $1 to the overall value of the property.

So even if the improvements are in good condition with many years of remaining physical life, the REL could be 0 years. An example would be an SFD built on land with zoning which would allow a more profitable use, such as commercial. Like that old house on what has become a busy corner intersection in a blossoming town. Zoning has changed to commercial, and McDonald's is dying to build there. The little old lady has kept the house up well, but Mickey-D is willing to pay twice what an otherwise similar SFD is selling for around the corner.

That would be 0 years REL, and it happens all the time. This is why FNMA is as concerned with REL as they are physical condition. They do not want to make a residential loan on a property that does not have the likelihood of remaining an SFD for a long time.

 

[RSW]

I use the M&S Residential Express software program and it will let me go in and choose the type of depreciation. Age/life will let you put in an economic life and you also put in the effective age. You may get unreliable results in the cost approach if your REL and EA are not reported accurately.

 

[Fred]

I like 60, easily divided, used for compass directions and time.

72 is good for divisibility also.

 

[PropertyEconomics]

72 is good for divisibility also.

100 is easiest .. in my opinion.