Help! Life Estate Appraisal

[airphoto]

Not really, LeeAnn ..

Over time they're dollars, but not the same dollars .. yo gubmint likes inflation .. you bought it for 20,000 1968 dollars (a year's earnings) and sold it today for 80,000 dollars (a year's earnings) but yo gubmint wants to call it 60,000 of profit and tax the 'gain.'

 

[Farm Gal]

Naw, they done seen the light and you get a big exemption off the front end of that difference. As long as you lived in it two of the last five years anyway

sigh...
fumblefingers again :redface:

 

[xm39hnu]

Originally posted by Mike Garrett, RAA@Jul 17 2003, 10:27 AM
You must be kidding...right? I bought my first house for $14,000 and sold it for $30,000. My second one I paid $17,000 and sold it for $80,000. Next I bought a condo for $23,000 and sold it for $80,000. No appreciation?????

No one would buy real property if it depreciated rather than appreciated. It is America's best opportunity. I think you should pass on the assignment for sure!

No, I'm not really kidding, but I agree with your statement. I've experienced similar appreciations in my own dealings.

Might make more sense, and make me sound less like an idiot, if I flip the question around, and ask instead that if it can be shown that houses appreciate in value, why do we recognize applying economic age-life depreciation to replacement cost new to be valid?

When a house appreciates, it is sometimes due to scarcity of land; more frequently, it is due to scarcity of shelter. So the improvements appreciate, sometimes to a greater degree than the land. In this situation, replacement cost new should not be depreciated if my reasoning faculties are still at work. Anybody disagree?

I do not want to become one of those jerks who just fills in the blocks, so I suppose theres going to be some markiet analysis courses in my near future. (Should've already been one; our qualifying ed program is not what it should be.)

In regard to your statement that nobody would buy real property if it depreciated, I disagree. Real property is certainly purchased for investment, but by and large it is purchased for the utility that it affords. You buy a car for similar utility. It depreciates the second you drive it off the lot. But you buy it anyway, don't you?

 

[Mike Garrett RAA]

Compare apples to apples. Real property appreciates, tangible items depreciate. No, I would not buy real estate if it did not appreciate. I would rent and let someone else have all the headaches and up keep.

I think you are also confused about depreciation. In the cost approach you are working with today's (hopefully) costs and then adjusting for depreciation from all sources. In effect you are adjusting for age and condition combined. In the grid you can separate the two.

Think about it for a minute. Take a deep breath. Have you ever seen real estate go down other then temporarily? No.....it continually goes up in value, just ask your tax assessor.

If you are ask to provide a future value for something, you need to take into consideration both appreciation and depreciation that's why it becomes a complex appraisal assignment. Think about what they are asking you to do. Tell us what you think that property will be worth at some point in the FUTURE. Over all property values will, in all probability increase...if nothing else due to inflation. The improvement will have a certain life expectancy...probably much longer than the period you are considering.

So you have several different problems to solve. First how far into the future will you have to project. 3 yrs, 5 yrs, 10 yrs, 15 yrs, 20 yrs. You can base this on the life expectancy of the holder of the life estate. Say she/he is 65 now. You might then choose to use 15 years. Next how much will the value of real estate go up? Could be Zero, 3%, 5%, 6%, 8% or any number you might choose to use depending on your market. My market has consistently shown 6% to 8% per year on an over all basis. So, if you know the present value of the property...solve for each time increment using each possible inflation amount.

$100,000 today......6% appreciation compounded for say, 5 years would be, ahhhhhhh
$133,822 or say $134,000. You do that for every time period and every possible appreciation rate. You would also make the assumption the property is well maintained and keeps it's marketability. If you know what the value of the property is projected to be, you can also use the age/life method to determine the depreciation for that point in time.

I hope I am explaining this in a manner that makes sense to you. Remember, predicting the future is much more difficult to determine than a retrospective or current value. Disclaim, disclaim, disclaim.

 

[deturner]

I really enjoyed the responses to this but I have to update everyone and let you know that I passed on the assignment. I am just too busy with orders now and trying to start my own shop that I just could not take on the assignment and provide the client with my best work.

I ended up referring them to a General in the area.

Dave in NC

 

[xm39hnu]

Originally posted by Mike Garrett, RAA@Jul 17 2003, 06:04 PM
I hope I am explaining this in a manner that makes sense to you. Remember, predicting the future is much more difficult to determine than a retrospective or current value. Disclaim, disclaim, disclaim.

Forgive me, all, for I am a dope!

Mike, the mechanics of sorting out the effects of appreciation are tedious, but mathematically trivial, 'specially with a spreadsheet. What I couldn't connect was why we calculate replacement cost new, and then depreciate for age, if property actually appreciates. (Now don't get the idea that I've been doing appraisals some other way--I haven't. Married to sponsor, and she won't let me.) It seemed inconsistent to depreciate on the one hand, and appreciate on the other.

Something you said just made my head pop out of there. We calculate <today's> cost and depreciate to get to <yesterday's> because property has appreciated, along with the cost of materials, labor, etc., and will continue to do so in the forseeable future. Seems a simple concept, but it eluded me.

Thanks for taking the time to help me out with this.

 

[Mike Garrett RAA]

Smart move!