Effective Age-Condition

[38Scarcello]

Pick your comps well and you don't have to worry about making big EA
differences.

That right there just about sums it up for me and ties a nice little bow around it.
According to post #7, this was supposed to be a stupid thread! OOPS!

:new_tomato:

 

[Richard Carlsen]

Effective age and condition are the same thing. Definition from the 1976 edition of Appraising Real Property by Byrl Boyce & William Kinnard. "Effective age is the age in years indicated by the condition and utility of a structure." Adjustments for both is double dipping.

Effective age/condition is the curable depreciation in the Cost Approach. Any remodeling, updating, renovation, cosmetic items would affect the condition.

Thank You Jo Ann my dear;

Your source has just confirmed what it took me about 7 years to conclude. Effective age and condition are the same thing.

Effective age is an estimate based on best knowledge available. These include visual observation during comp drive-by, listing brokers comments, MLS multiple photos and virtual tours. Generally, other than the current drive-by viewing, what you see and learn is the condition of the property at the time the buyer made the buying decision. It is based on these that my estimate of effective age is made.

One thing you do need however, is to be consistent with your depreciation in the Age-Life method since that is the basis for you estimate. For me, based on a 60 year economic life, an "average" 10 year old house means that the effective age can be from 4 to 8 years while on a 35-40 year old house, average condition is from 13 to 20 years effective age. A 100 year old house may be average and have an effective age of 18-28 years. This is just the benchmarks that I have developed over the years that seem to work. They are not written down anywhere nor did I get them from a class. Lacking a way to effectively measure effective age, this is what I have come up with.

 

[Mztk1]

The following are some opinions that are good today. Tomorrow they might not be.

The cost approach on page 3 of the URAR is economic life, which is different from effective age. Many appraisers I have discussed this with tend to treat remaining economic life and effect age as part of the same theory. I think that is probably wrong.

Fannie Mae (whose guidelines we follow with the URAR) wants effective age to reflect the physical condition of the property.

Section 404.02 - Actual and Effective Ages
The relationship between the actual and effective ages of the
property is a good indication of its condition. A property that has been
well maintained will generally have an effective age somewhat lower
than its actual age. On the other hand, properties that have an
effective age higher than their actual age probably have not been well
maintained or may have a particular physical problem. In such cases,
the lender must pay particular attention to the condition of the subject
property in its review of the appraisal.

Therefore, when completing a residential URAR report they are part of the same theory. Total economic life (TEL) is the expected term a house would maintain a value without any improvements made. Effective age (EA) is how much of that time that has expired factoring in improvements, updating, etc. Remaining economic life (REL) is the total economic life less the effective age. If TEL = 60 and EA = 20 than REL is 40.

Where did economic life come from? Especially the idea that the original economic life should be 60 years or any particular number of years. Original economic life has two factors: 1)Quality of construction 2)External influences.

On the URAR external influences do not play a role, they are accounted for separately. Total economic life is based on expected physical life of an improvement should no further improvements be made, and it comes from the market. There is a way you can determine it from your desk when you have comps that have never been updated and they are younger. If you want to know drop me a private message. But on page E-7 in the Marshall and Swift, the book appraisers have traditionally relied on for the cost approach, there is a table for TEL based on their market studies nationwide. Average quality average condition is 60 for concrete block and 55 for frame housing. You can argue with it, but at least it is something to fall back on.

A well built house without any negative exteranl influences should have an infinite original economic life. About 15 years ago I appraised a house built in 1890. Said house had been completely gutted and everything except the wood timbers, planks, and the foundation(Bricks) had been replaced or new and current equipment and built ins had been installed. All of the remodeling had been done within the previous 24 months. The only negative was a freone had been allowed to get on the wood exterior behind the AC unit and the paint was not sticking like it should.

Economic life, the way we use it for the cost approach, is a component used to measure physical depreciation not external inadequacies. We factor external depreciation and functional obsolescence on their own.

Example: A brand new two story brick veneer home was built a couple of years ago in Clevealnd, Texas in a block, on a street that has all vacant lots going commercial. The exterior observation of the dwelling indicates it would be difficult to convert the floor plan to commercial without major reconstruction. IMO the original economic life of the structure could be zero as the structure's H&B use is in serious conflict witht he H&B use of the raw land.

The TEL (how long a typical improvement like it is anticipated to contribute value to a property without making improvements) would likely be 60. Remember, TEL comes from the market, not from the subject itself. The effective age of the subject (when effective age is viewed from an AI definition), on the other hand, might be 58 because economic/external influences caught up to it quickly. The AI tells us that all form of depreciation should be built into the effective age (functional and economic). But in a residential report we have traditionally parsed our types of depreciation to express which is what and why. So your new house may have a TEL of 60, an EA of 0 and its economic depreciation as measured in the URAR might be the entire cost to build plus cost to demolish.

At the risk of being verbose, but for full disclosure, let me point out that Fannie Guidelines do not require a total economic life estimate or estimated remaining life estimate. Only the estimate of effective age. So what you do is not "wrong" but perhaps just a little unorthodox. That's good, it shows you are thinking about appraising and not just filling in forms. But those who do it the other way are not incorrect either and I am merely trying to explain, not influence.

IMO effectife age should be the actual age adjusted for maitenance and updating or remodeling.

A 10 year old house with the original composition roof can not have the same effectife age as the identical 10 year old house next door that has just had it's composition roof replaced.

IMO both houses should be considered to have an effective age of 10 years. One should have a condition adjustment for the older roof.

IMO condition has limited or no effect on effective age until condition nears or reaches the point that the house is not livable.

I agree with several who pointed out that effective age is frequently used to tweak the appraised value.

Someone please tell me how a house of any age over 30 years can have an effective age of 25 years and remain livable. How can a 5 year old house have an effective age of 3 years? I have seen and/or heard both comments. Sounds like tweaking to me.

TEL measures how long a structure is expected to contribute value if no improvements are made. Effective age is the age of the house relative to its improvements made. So a 10 year old house that has never been updated at all and has a 10 year effective age and sells as a market sale for $100,000 has, for arguments sake, 50 years remaining in economic life. It suffers 20% depreciation and its improvements cost $70,000 to build. Now we appraise a the identical house, same condition but it has a roof and, having great comps, it comes in a $105,000. Its effective age would be 8. On the first house the dwelling sold for $100K, Bldg was worth 70K less 20% depreciation so our land value is $44,000. On our subject the land value is the same so the building contributes $61,000, which is 87% more or less of the cost to build new. Our problem becomes 60 divded by X = .13? And our answer is 60 X .13 = 7.8 or 8 rounded.

As described in the 1890 era house above. Remodeling or updating as some call it can theoretically eliminate any amount of age.

You can eliminate a lot but the only way to eliminate it all is to knock it down and start over.

I agree with one of the earlier posters, please advise how to derive effective age from the market. I think the remaining economic life can be drived from the market as in the new house in Cleveland I described above. IMO that new house could probably be proved to have no remaining economic life at it's inception.

I think I showed this in your 10 year old comp example.

Another variation is two houses side by side that were built 60 years ago. One has been remodeled/updated with everything new except timbers, planks, and foundation two years ago but has been poorly maintained since the remodel. IMO effective age would be 10 or less. I just don't like going below 10??? Condition would be poor and require a large adjustment.

The other has never been remodeled/updated but has received exceptionaly maintenance throughout it's life. IMO effectove age could be well above 10 years and require an adjustment but condition would bed average and require no adjustment.

Maybe. As appraisers some believe we should take ourselves out of the equation and let the market speak, not our opinions. Others like to claim they are being paid for their opinion, so that is all that matters. I go with the first group and so, for me, effective age is not any different. You have to let the market tell you the effective age, not your hunch. To a gut appraiser, effective age adjustments are fudging. In practice, when I see a gut appraiser's report making effective age adjustments (and you can tell the difference between a gut guy and a facts/market analysis appraiser) I not only think they are fudging, but I think they think they are fudging it but that it is okay because it leads to their final, gut driven, opinion of value. (BTW, I don't make effective age adjustments, just condition and actual age adjustments).

This last comparison is extreme but is being used to attempt to point out the difference IMO between effective age and condition.

The URAR says actual age. IMO that requires an analysis of any remodeling/updateing with a resulting adjustment. However, to do that properly the appraiser would have to do the same analysis of the sales used as comparables.

I base my determination of effective age of the comparable sales on observation from the street, conversations with realtors, conversations with anyone else who will discuss the issue, and my own experiences in the area. This part of the competency requirement.

Now that I have gone completely in a circle please comment.<><

Age is an actual, straight, factual number. To me, it measures incurable types of depreciation. A 7 year old house has 7 year old appliances that might need replacing in 3 to 5 years and a roof that might need to be replaced in 8 to 13 as opposed to a 2 year old house all other things equal will likely have different values. But more than likely it wouldn't be practical to replace the roof or appliances in the 7 year old house now, so the depreciation is incurable and, from my perspective, in adjusted for in the actual age. Roof rafters, foundation, slabs, timbers in a structure, etc., are also incurable.

Condition on the other hand, for me, reflects curable types of depreciation. You have two 1890 houses but one has been fully updated and the other is not. As long as I have comparables that have been updated and not updated, I can extract a market reaction for the condition and make an adjustment without relying on an actual effective age number.

 

[PropertyEconomics]

Wrong PE,

The cost approach provides a very accurate rate for the subject and a good point for yearly adjustments for that value and age range of home, however the comps are adjusted on their merits.


If I recall right your method uses actual age to establish depreciation, it often uses total life of over 100 years. How you fill out a fannie mae form cost approach with those numbers and not get questions from the underwriter is beyond me.

You missed the point Mr Raney ... we will leave it at that. It appears you want to attack 'my method' ... its not my method Mark. Its market derived. To use a REL of a home under the premise that it receives no updating is a farce ... have you ever seen one that didnt receive updating?

As Mr Klos as pointed out actual age is a fact that cant really be disputed. If you measure depreciation from your comparables, which have also received updating, or are of similar age to your subject, then your depreciation numbers are much more accurate than those which come from a book of numbers. Im not saying you cant use the book if you are consistent, but rather that the book makes an error in theory that a property will last so long with no updating. Its not real world as I have pointed out.
And should your maket show a REL of 100 years why is that hard to understand? Its from the market. Its based upon analysis of market transactions. If an underwriter questions it then so be it. It is my report, it is my analysis, and I can show where the analysis came from. It appears based upon your comments that underwriters are no more than form fillers too and if they cant understand the math or reasoning of going to the market for the answers then there is little I can do to help them. My job is to reflect the market, not put in a number becasue and underwriter will accept it and make my life easier.

Appraising is not easy sometimes and its for this very reason that the most qualified appraisers have removed themselves from mortgage lending. Its the form filling questions that others cant grasp that leave those of us measureing from the market shaking our heads not only that the stipulations but also at the mess the housing market is is now. No I realize depreciation and economic life have not caused the crisis, but they are merely one more symptom of a, book reading and form filling, generation that aruges against measurement from the exact market in which they appraise. Arguments most probably grounded in misunderstanding of how the market works because the market numbers dont agree with the book they read.

In any event .. I remove myself from this thread as "my method" has become more the focus than the original topic.

I wish you the best as always.

 

[RSW]

PE, I may not agree completely with your method, but I do respect your opinion. Each appraiser does things his own way and hopefully he/she can support his method if it is ever challenged in a court of law.

 

[Brad Ellis]

wj,

I am actually going to answer your first question.

The seperate lines for age and condition deal with long lived (typically incurable depreciation) whereas the condition line deals with short lived curable depreciation.

Long lived items like foundations, roof rafters, etc. that are typically never replaced during the economic life of the subject still do wear out over time. So you could have two homes of widely varying age that command different prices even while they are both in the same current condition. Age adjustment - if the market differentiates.

Or you could have two homes of the same exact age but in different condtion due to updating, etc. Condition adjustment.

Brad

 

[RSW]

Brad, That is what I said in post #8 when this thread first started.

 

[Terrel L. Shields]

the condition line deals with short lived curable depreciation.

agreed.

Long lived items like foundations, roof rafters, etc. that are typically never replaced during the economic life of the subject still do wear out over time. So you could have two homes of widely varying age that command different prices even while they are both in the same current condition. Age adjustment - if the market differentiates.

I have never seen a rehab'd house, even stripped to the rafters and studs that assumes the effective age of "zero"..it just doesn't seem to happen.

If you want some extremes in depreciation, try appraising a poultry farm. Updates required by the integrator are in cycles of about 7 years, sometimes less. The buildings will stand 30 + years. The equipment varies from 10 - 15 years in life but wall curtains, fans, and drinkers tending to the short side and feeders, heater, etc. to the long side of that range. Yes, each design may be similar for years. 40' x 400' houses were the norm around here for decades until 43' x 500' houses took over.
Yet, you have to analyze a sale with some knowledge of the barn age, the equipment age (or at least the last cycle required), and simply by looking at the equipment (a rusted feed bin is on its last legs literally as they will fall over if corroded) A functional is often present where an integrator requires equipment upgrades to transfer the contract but allows the current grower to eschew the upgrade. Depreciation is far more complex than appraisers seem awares.

 

[Brad Ellis]

Terrell,

Never said effective age ought to be zero, but I;ve done some stuff where all that was left standing before the rehab were the baloon frame posts and foundation- that one had a very low effective age- but not zero.

Yeah- so know I got a call on that one as the UW did not bother reading the explanation.

As to the poultry farms, thanks but no thanks. I'll leave thos eup to your expertise.

Brad

 

[Terrel L. Shields]

that one had a very low effective age- but not zero

That was my point. Even if you didn't know it, somehow they just don't sell as high. I've known a couple that are indistingushable from nearby homes of the same builder but simply don't cut it. Sometimes the roof pitch will give it away....Then again I recall a rehab that was reroofed first, then stripped to the stud walls, found termites, jacked 'er up, and poured a slab beneath and gently sit 'er back down...next morning the frame had jackknifed and laid the whole mess over.. I imagine the owners first words that morning wasn't "my my my..."