Effective Age

[moretti]

Looking for a little assistance.

3 year old home. From the outside appears well maintained. Interior has been broken into and vandelized. Broken cabinets, spray paint on walls, broken tiles, torn up carpet, smashed glass etc.

How does one determine effective age on a property like this?

 

[stefan olafson]

That really isn't an effective age question. It's a repair question, are you doing an REO property where you need to list cost to cure?

 

[moretti]

That really isn't an effective age question. It's a repair question, are you doing an REO property where you need to list cost to cure?

Yes its an REO property. But my question does have to go with the effective age. What should it reflect. The client has questioned my effective age stating due to the damage.

Its not a question of the home being maintained becuase its been wrecked. I dont know how to address that.

 

[stefan olafson]

If you look past the items which can be repaired, if you can visualize the property with secured entrances, replaced cabinets, clean freshly painted walls, repaired or replaced tiles, clean fresh carpet, and repaired glass, they you can determine effective age.

Completing an REO appraisal require you to determine the 'cost to cure' the items you have listed. Your effective age is then determined from the property after these items are corrected.

My guess is your effective age 'as is' is the same as your physical age, you shouldn't take into consideration the items you are going to require to be repaired into your decision of effective age.

 

[moretti]

If you look past the items which can be repaired, if you can visualize the property with secured entrances, replaced cabinets, clean freshly painted walls, repaired or replaced tiles, clean fresh carpet, and repaired glass, they you can determine effective age.

Completing an REO appraisal require you to determine the 'cost to cure' the items you have listed. Your effective age is then determined from the property after these items are corrected.

My guess is your effective age 'as is' is the same as your physical age, you shouldn't take into consideration the items you are going to require to be repaired into your decision of effective age.

Ok it seems like you have said to conflicting things. Your first paragraph says to look past the defciences to assume everything is in good shape. But that would not be an as is appraisal, which is what I am completing. I understand that I have a repaired value that I am providing, and in that case the effective age could be less. But currently , the as is effective age has to take into account the defciences. But I guess my real thought is that why does the effective stop at its actual age?

If i were to compare this house to a a house with actual age of 5 and effective of 3, and this house had an actual age of 3 they still would not be in the same ballpark. Functionally they 5 year old house would be far superior due to not having deficiencies. Do you get what im confused about ? What stops the effective age from being more then the actual? To me when its damaged like this its almost like effective shouldnt even be considerd becuase its not typical or really even habitable until repaired.

 

[stefan olafson]

Hopefully someone else will join this discussion and help you out.

When developing the "as-is" value, you take into consideration the repairs necessary and those costs and how they will affect the overall market value of the property.

Let's just say for demonstration purposes, the following:

You have a three year old home with lots of vandalism and you are completing an REO appraisal on the property. One of your tasks is to give an honest opinion of the 'cost to cure' the vandalism. So you get bids from professionals and list them in the report. Let's just say the bids equal $10,000.

Is that the adjustment you make in the 'as-is' part of the assignment? No because you have to judge the market reaction to those bids, what would a 'typical' buyer do? You have to do a little crystal ball gazing to maybe come up with a supportable adjustment of $7,500 because a typical buyer could possibly remove the broken glass, broken tile, ruined carpet, and repaint the walls for considerably less than the cost to have it done.


The effective age of the property is still most likely similar to the physical age with the adjustment included for repairs..... That will be included in your 'as-is' value. Say your comparables are in overall good condition, wouldn't you make an adjustment of some type based on the expense you would face to fix those repairs, a negative adjustment to condition on the comparables?


When you complete the 'as-repaired' portion of the appraisal, with the assumption you've had all items repaired by those professionals, your effective age most likely will be less than the physical age, more closely compared to new homes.....

 

[Mztk1]

There are complicated methods that aren't worth the time, and a simple method that is not going to be 100% accurate but reasonably close.

I am going to assume you do not have land sales and that you use the M&S for cost and for total economic life, which I'll pretend is set at "60" based on that book.

Take your comps that are in average condition and estimate their effective age and their cost to build. This will get you a value of the subject land (site) via extraction.

Now determine the value of the subject via the sales comparison approach (which I presume you already did).

Using the land value you got from the extraction method, build your subject in the cost approach without any depreciation. This will give you a number higher than your figure in the sales comparison approach.

Now extract the effective age. The simple way is to go into your physical depreciation section of your cost approach, set the total economic life at 60, and play with the effective age until your cost approach value is similar to your sales comparison approach value. What you are doing is actually extracting the effective age.

It is VERY likely that your effective age is going to be higher than your actual age.

Some might protest that this is backing into the effective age/depreciation, etc., but like I said, there are more complicated ways to determine it, they just aren't going to provide significantly different results so they aren't really worth the effort.

 

[CANative]

If you went to a car dealer and were looking at 2008 models and found one you like except it had 4 flat tires you wouldn't say: "Hey this car is more like a 2005 than a 2008 because it has flat tires." You'd say: "I like the car but it needs new tires which will cost about $800." You'd then offer the dealer a thousand dollars less than the same car with good tires.

Effective age is just a component of the economic age-life method of estimating depreciation. This isn't the greatest method of estimating depreciation but is the alternative when market data is scarce and the breakdown method is too time consuming for residential mortgage appraisals.

You're subject's condition problems affect short-lived items and the damage was not caused by inadequate maintenance or functional obsolesence. They were caused by atypical and extreme short-termed carelessness.

 

[stefan olafson]

From page 385, The Appraisal of Real Estate, 12th Edition..

"Effective age is the age indicated by the condition and utility of a structure and is based on an appraiser's judgement and intrepretation of market perceptions.....

What moretti is getting confused on is vandalism and the cost to cure that vandalism, both in the as-is and the as-repaired opinion of value....

The effective age of a three year old building with vandalism will more than likely be higher than the actual age... The effective age of a three year old building which has been repaired will more than likely be lower than the actual age....

The effective age is based on the appraisers perception of the market, not a function of the cost approach!

 

[stefan olafson]

BRAVO!

Greg, what I have been trying to explain is summed up so well by your last sentence...

"You're subject's condition problems affect short-lived items and the damage was not caused by inadequate maintenance or functional obsolesence. They were caused by atypical and extreme short-termed carelessness."

I agree 100%!