FNMA Messages

[Terrel L. Shields]

the development of an opinion of effective age remains large.

USPAP demands we "support" our conclusions, but it does not demand it be mathematically rigorous. So I present this and I have "supported" my adjustment and basically effective age should be capturing physical, functional, and external obsolescence and again, USPAP does not require we address anything but accrued depreciation in the cost approach.

So if I use houses of similar age or similarly remodeled, we don't have a lot of choices. Much of the confusion about depreciation lays in older houses, one reason so many declare that the CA isn't "applicable" in older homes. It almost always is "applicable" but may not be "necessary". That is a different subject. So when a house gets remodeled (and almost all 80 year old homes will be remodeled) we could mechanically estimate the % that is old and the % that was "new" at the time and muddle through a lot of math gymnastics, or we can do the above and try to estimate the cost to REPLACE (not reproduce) a house of the same size and quality and then extract the effective age from similar homes. We do need to be aware that "replacement" costs eliminates all those functional issues created by remodeling - ie.- different materials, mismatched ages, step downs to parts of the house, roof lines that don't match, etc. I have often recommended to people to sell their home rather than remodel, but I can't think of anyone off-hand that ever took that advice. But I can think of one divorce that happened over the issue when cost overruns on the remodeling led to a huge fight and the husband moving out just as the project was completed. And that house to this day won't bring what it cost to remodel plus the original value of the house and lot.

It is not a difficult process to extract such from the market of similar older remodeled homes that have sold. And once you see a trend (the total life is generally between 50 - 70 years for instance) then if the calculation suggests a 100 or 150 year total economic life, then it serves as a check on the property. Did you underestimate the land value? I find often that is the case and in an extreme case you may drive by again and see that house is gone and they are building a new one... The house may have been in worse condition than you thought at first. There may be a scarcity of land so that we've underestimated the land value in a developed area. I know in Denver friends sold their home for over $2 million. It was a scarce multi-acre large lot in S. Denver (Cherry Creek) and the house was older (1960s or so) and remodeled in the 1980s. But the buyer tore it down and built a new larger home. They, in turn, bought a house and added on spending several million in the process. I have no idea why they didn't just do a deep remodel of the house they lived in, but... you know how we are.

At times, these problems seem hopeless but as appraisers, we have to think them through and try to solve the problem. Too much pressure to perform with short turn times complicates our thinking process and exposes us to more chance we screw it up.