Effective Age and Remaining Economic Life?

[EddieHibbard]

I recently started my own firm and I have been evaluating the liability of certain areas of my appraisal reporting and I want some feedback to possibly help marginalize possible liability issues in my reporting.

The questions are how is everyone calculating Effective age and also how are you calculating Remaining economic life?

COMMENT -

Currently I try to do very little cost approach as I feel that it is a poor method of calculating value in most instances, I believe it is supposed to be scientific yet calculating depreciation is a very un-scientific task. Obviously there are areas where it is effective however, IMHO new construction should be one of the only areas in which residential appraisers are required to do this approach and reproduction should be the only method calculated. This is just an opinion, I am open to debate on this.

EXAMPLES -
I calculate effective age as:
5 year old average house competing with properties from 1-10 years old. Subject is similar to 2 year old property in condition, effective age is 2. Learned this from an AI book and instructor.

Remaining economic life as:
I look at the market I am in and make an estimate of how long the average economic life is and then take away the actual age. This makes sense for commercial properties, unfortunately this is a very debatable method for SFR properties. I also learned this from an AI book and instructor.

I am curious to hear the more experienced appraisers answers here but I am also interested in newbie answers. I am seeking to be more comfortable in these areas.

Thanks,

Ed

 

[George Hatch]

There are different theories used to explain the loss in value attributable to age and condition. I think it's important to note that the term "remaining economic life" is not solely determined by physical condition; and indeed, sometimes is not even primarily determined by physical condition. It is expressed in economic terms and would logically include consideration of the improvements within the context of its immediate neighborhood as well as it's market segment.

As an example, a 2,000 room hotel on the Las Vegas Strip that's only 5 years old and which could ostensibly remain physically operable for 30 more years might have a remaining economic life of zero if the redevelopment of the site into a 5,000 room hotel is economically justified. Conversely, a 100-year old brownstone in NYC may have a remaining economic life of another 100 years (or more) depending on the trends prevalent in its neighborhood.

The deprecation section of M&S are based on this type of reasoning, which is why the formula that they use in conjunction with their depreication tables and their arbitrary economic lifespans IS NOT:

Economic Life - Effective Age = Remaining Economic Life; Effective Age being the component estimated by the Appraiser.

It is: Econ.Life - Remainder = Eff. Age; and it's the Remainder that is estimated by the appraiser. The difference is that the appraiser is making the estimate based on economic terms - which include the effects of the physical condition - rather than on primarily physical terms.

You should not use the depreciation tables and economic lifespans presented in M&S without also using the same methodology for coming up with the effective age and remaining economic life figures. Mixing them up or misusing the tables is a mistake.

 

[Deleted member 128537]

Effective age and remaining economic life is a fairly subjective thing, but not without reason. I think it is possible to be within 5 to 10 years, but that's it. But remember subjective judgment is part of the appraisal process. Paired sales analysis is hard to do in rural areas where there is little conformity. So one has to make some subjective judgments based upon experience. We try to be "scientific" but the reality is that nothing counts for experience and intuitive knowledge in some situations. For example I sell real estate as well. I do so because I get a great deal of feedback from buyers. I know that a certain type of house will sell for more than another. this gives me hard data from the actual market. But I'll be darned if I can come up with a scientific measurement through paired sales analysis. So intuitive judgment from experience talking to people is not a bad thing.

As to cost approach I will have to say in selling real estate and doing appraisals I have found the cost approach to be very useful if the house is reasonably modern. In fact there are numerous times when I did appraisals for sellers my Cost Approach was more accurate.

Also Marshall & Swift has a table that gives some guidance in their cost book as to effective age.

 

[EddieHibbard]

Thanks for feedback.