Effectve Age

[J Grant]

What the lender wants to know is if its okay to offer a 30yr mortgage at SFR rates/terms on this property. Or are they inadvertently making a land loan?

Agree. Most clients on most assignments are lot looking for a precise calculation of effective age (if they are, then fulfill that ), but most just want to know if the subject is maintained vs updated vs neglected and how that plays out in the effective age/condition. Does what the appraiser reports make sense? If the photos show no updates on a 40 year old house but the appraiser gives it an effective age of 5 years and a C3 or C 2 condition, it is either misleading or incompetency, either way it affected assignment results.

The client uses effective age in part to see the $ contribution of improvement relative to land value. Appraisers estimate it for the same reason - HBU -( is it worth more as vacant land) for comp comparisons wrt their relative effective age , for cost approach etc.

 

[TerryRohrer]

They aren't. I said DEPRECIATION is extractable.

By osmosis? How do you extractable it without doing any calculations?

 

[Basically Rectangular]

Market sale abstraction utilizing replacement cost (from American Society of Appraisers)

Sale price less land value from comparable sale = Depreciated Improvement Value
Calculate Total Replacement Cost for comparable sale

Total Replacement Cost - Depreciated Improvement Value = Total Depreciation
Total Depreciation / Total Replacement Cost = Percentage of Depreciation of Improvements

Total Economic Useful Life x Percentage of Depreciation of Improvements = Effective age estimate

Repeat for your comparable sales and you get a range which you can use to support you effective age estimate.
Set it up in a spreadsheet and it is quickly developed.



You need to know: land values, replacement costs, total economic useful life of comparable sales.

 

[J Grant]

Market sale abstraction utilizing replacement cost (from American Society of Appraisers)

Sale price less land value from comparable sale = Depreciated Improvement Value
Calculate Total Replacement Cost for comparable sale

Total Replacement Cost - Depreciated Improvement Value = Total Depreciation
Total Depreciation / Total Replacement Cost = Percentage of Depreciation of Improvements

Total Economic Useful Life x Percentage of Depreciation of Improvements = Effective age estimate

Repeat for your comparable sales and you get a range which you can use to support you effective age estimate.
Set it up in a spreadsheet and it is quickly developed.
View attachment 72602


You need to know: land values, replacement costs, total economic useful life of comparable sales.

The above chart is not correct to depreciate the economic life the same as the physical components. Economic life can be much longer than the effective age estimate. An older building with deferred maintenance can have an extended economic life greater than its effective age if it is still habitable and used by owners or tenants for example

(Effective age is the age of a property based upon its condition, not its actual age.
If an appraiser examines a building that is 25 years old, but because of superior upkeep has the condition of an 11-year-old building, the appraiser may use the 11-year-old age as the effective age of the property.
Economic life is the length of time during which a piece of property may be put to profitable use, usually less than its physical life.)-

The above is from an article but I disagree the economic life is always less than physical age. Above, the 25-year-old actual age building can have an 11 year effective age yet a 50-year estimated economic life, assuming ongoing adequate maintenance.

 

[Basically Rectangular]

The above chart is not correct to depreciate the economic life the same as the physical components. Economic life can be much longer than the effective age estimate. An older building with deferred maintenance can have an extended economic life greater than its effective age if it is still habitable and used by owners or tenants for example

(Effective age is the age of a property based upon its condition, not its actual age.
If an appraiser examines a building that is 25 years old, but because of superior upkeep has the condition of an 11-year-old building, the appraiser may use the 11-year-old age as the effective age of the property.
Economic life is the length of time during which a piece of property may be put to profitable use, usually less than its physical life.)-

The above is from an article but I disagree the economic life is always less than physical age. Above, the 25-year-old actual age building can have an 11 year effective age yet a 50-year estimated economic life, assuming ongoing adequate maintenance.

The chart does not depreciate economic life. The economic life is a constant which is based on quality of construction, best to pull it from a cost manual.


The chart does not imply that economic life is less than effective age. You are interjecting that into the conversation.


This is simply a market based approach for depreciation, which is applicable to supporting an effective age estimate.

You are adding confusion to this subject.

 

[J Grant]

The chart does not depreciate economic life. The economic life is a constant which is based on quality of construction, best to pull it from a cost manual.


The chart does not imply that economic life is less than effective age. You are interjecting that into the conversation.


This is simply a market based approach for depreciation, which is applicable to supporting an effective age estimate.

You are adding confusion to this subject.

I am not adding confusion ( the statement about economic age less than physical life is from an internet article, not your chart0

Imo your representation of economic age using a depreciation formula /quality of construction ignores the conceptual aspect that they differ -effective age is based on depreciation, maintenance and quality of construction, whereas economic age, can include that but also includes an estimated projected future profitable use.

A one year old actual age building can have a projected economic life of 60 years (or more) as an example. I've seen 100-year-olddwellings still having a fair amount of economic life left despite having high depreciation.

 

[Basically Rectangular]

I am not adding confusion ( the statement about economic age less than physical life is from an internet article, not your chart0

Imo your representation of economic age using a depreciation formula /quality of construction ignores the conceptual aspect that they differ -effective age is based on depreciation, maintenance and quality of construction, whereas economic age, can include that but also includes an estimated projected future profitable use.

A one year old actual age building can have a projected economic life of 60 years (or more) as an example. I've seen 100-year-olddwellings still having a fair amount of economic life left despite having high depreciation.

You are adding confusion.

Who said anything about economic age? What is that and what are you talking about now? This thread is about supporting an effective age estimate. Have you provided a method/example?

This method uses the comparable sales utilized in the sales comparison approach. They should be similar to to your subject. Nothing is ignored.

In the case of a 100 year old building (or any chronological aged structure), that is why we extract the effective age using comparable sales through depreciated cost.

 

[J Grant]

Market sale abstraction utilizing replacement cost (from American Society of Appraisers)

Sale price less land value from comparable sale = Depreciated Improvement Value
Calculate Total Replacement Cost for comparable sale

Total Replacement Cost - Depreciated Improvement Value = Total Depreciation
Total Depreciation / Total Replacement Cost = Percentage of Depreciation of Improvements

Total Economic Useful Life x Percentage of Depreciation of Improvements = Effective age estimate

Repeat for your comparable sales and you get a range which you can use to support you effective age estimate.
Set it up in a spreadsheet and it is quickly developed.
View attachment 72602


You need to know: land values, replacement costs, total economic useful life of comparable sales.

your own chart says 8) Economic Life ( age ) then #()9 it lists effective age estimate

It shows a formula for economic life using depreciation applied similar to effective age ( which for economic life estimate may not be correct) - there is no confusion present about me pointing that out.

 

[Basically Rectangular]

your own chart says 8) Economic Life ( age ) then #()9 it lists effective age estimate

It shows a formula for economic life using depreciation applied similar to effective age ( which for economic life estimate may not be correct) - there is no confusion present about me pointing that out.

"your own chart says 8) Economic Life ( age ) then #()9 it lists effective age estimate"

That is the whole point of this exercise!!!!!!!!!!!!!!!!!!!!!!!!!


The economic life is a constant which you pull from a cost manual!!! Economic life should be the same for your comparable sales as they are COMPARABLE to the subject!!!

If the comparable sales have a different quality of build or have a significant difference in chronological age as compared to the subject, better not to rely on them for supporting the development of effective age.

Yes, although not specifically outlined in USPAP, we do need to apply common sense in our methodologies.


Here is a table suggesting economic life from Marshall & Swift, it is also used in the article which I attached if you actually took the time to read it.

 

[alebrewer]

he chart does not depreciate economic life. The economic life is a constant which is based on quality of construction, best to pull it from a cost manual.

I've always used reciprocals to calculate TEL. Of course, I don't trust cost manuals. Based on the example you used above, the TEL would be 81 years, not 55, right?

43% depreciation / 35 years = 1.23%/year. 1/1.23% = 81 years, right?