Effectve Age

[Gobears81]

"economic obsolescence" defines the Great Recession. So I respectfully disagree. EO can crash the effective life when credit seizes up and homes sell for pennies on the dollar. That is the very definition of "economic" obsolescence in my book.

I agree that EO does lower the economic life, but I was referring to the practice of extracting depreciation on a yearly basis. Economic obsolescence is not worse for a 50-year-old property vs a 5-year-old property. It would inherently be the same on a percentage basis (less on a dollar amount basis if calculating physical/ functional obsolescence first). If economic obsolescence is present, extracted depreciation from a sale of a newer property will overstate depreciation on an older property if applying on a per year basis. That is something that I've seen done on ad valorem appraisals quite frequently.

Just making up an example, ignoring FO for simplicity:

Sale 1: 10 years old. 50% depreciated. 40-year useful life, but the implied economic life is 20-years. That indicates that economic obsolescence is 33.33% of the physically depreciated cost.

An appraiser concludes 5%/ year depreciation. Applying that to a 15-year-old property suggests 75% depreciation. BUT, if physical deterioration is 2.5%/ year and EO is 33.33% of physically depreciated cost, total depreciation on the 15-year-old property is not 75%, but 61%.

 

[sputnam]

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

You continue to conflate effective age with depreciation. They can be related but, they are not the same things.

 

[sputnam]

You are confusing economic life with effective age, they are not one and the same. Read the definitions of each one. For Comps we use effective age for comparison with the effective age of the subject

That's right.

 

[shrubberyvaluation]

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.

If it is a C2 condition completely new home except for the foundation I wouldn't find an effective age of 5 years misleading

 

[Terrel L. Shields]

If it is a C2 condition completely new home except for the foundation I wouldn't find an effective age of 5 years misleading

If you are expected to provide an accurate estimate for the SF adjustment, then why would effective age be a guess when it can be extracted from the sales used? And that is exactly the situation. If I extract a 23 effective age from the market, that sharpens the correlated "condition" portion of the C classifications. Even assuming everything is at least 50%, then 5 practical classifications are 10% each. If you apply 23, then 23/50(TEL as an example but you can also calculate that) then you can shave the range of adjustment from 10% to 2%. Now you have to rate condition - which is the judgment part of the C ratings.

An appraiser concludes 5%/ year depreciation. Applying that to a 15-year-old property suggests 75% depreciation. BUT, if physical deterioration is 2.5%/ year and EO is 33.33% of physically depreciated cost, total depreciation on the 15-year-old property is not 75%, but 61%.

Often EXOB relates to nearby land values. If a street gets rezoned to commercial, the dwelling accrued depreciation increases as the land value increases. In Bentonville, AR, with the rapid expansion of Walmart over the last few decades, the town had to expand a number of traffic corridors with attendant commercial development. After all, a town of 13,000 in 1990 when I started appraising has a real problem when the town becomes more densely populated to 55,000 in a mere 30 years. Not to mention some nearby bedroom communities growing even faster. Virtually all the houses on the highway between Rogers and Centerton, AR went from residential in 1990 to commercial retail today. And house left is usually an office.

 

[Gobears81]

Often EXOB relates to nearby land values. If a street gets rezoned to commercial, the dwelling accrued depreciation increases as the land value increases. In Bentonville, AR, with the rapid expansion of Walmart over the last few decades, the town had to expand a number of traffic corridors with attendant commercial development. After all, a town of 13,000 in 1990 when I started appraising has a real problem when the town becomes more densely populated to 55,000 in a mere 30 years. Not to mention some nearby bedroom communities growing even faster. Virtually all the houses on the highway between Rogers and Centerton, AR went from residential in 1990 to commercial retail today. And house left is usually an office.

I agree with what you are referring to, but believe that additional depreciation is functional due to superadequacy, rather than external.
Looking at the two types of external obsolescence, that additional depreciation wouldn't be external due to economic factors. Could it be external due to locational factors? I regard that type of obsolescence for issues such as backing up to an interstate, but that would be a loss in value, and the site could still be best suited for a residence.
In your example, the additional land value that is attributable to the site being better suited is functional, as it is the wrong use for the site. Put the house one street over and no additional obsolescence is recognized.
Fully cognizant that there is not consensus on the above. But how would EO increase as a residence ages if it is on an interior street in a residential neighborhood?

 

[Terrel L. Shields]

In your example, the additional land value that is attributable to the site being better suited is functional, as it is the wrong use for the site. Put the house one street over and no additional obsolescence is recognized.

Denis and I used to round and round - I am arguing that a change is HBU due to development and zoning changes is external to the property.

 

[Gobears81]

Denis and I used to round and round - I am arguing that a change is HBU due to development and zoning changes is external to the property.

IMO, the ideal improvement is a litmus test on EO vs FO
Say there are apartments in high demand in a high density location. A developer buys a site that is approved for 100 units and builds a 20 unit project with no feasible way to add on. Too much site for the building, ie a bad move by the developer. If those were the circumstances when it was first developed, would an appraiser recognize EO for development or zoning changes that took place previously and were well known by the developer?
We first develop the cost approach for a hypothetically new property and then develop depreciation. I agree that development and zoning changes are external, but that is all in the past. If it is built today, the lost money would be due to poor planning on the developer's part, not external factors