How to determine effective age?

[DWiley]

Effective age is just an opinion?!!? :new_smile-l:

My copy of The Appraisal of Real Estate details several acceptable methods for deriving the effective age of a property, but neither "personal opinion", "gut-feeling" or "based on experience" are listed. Are these "recognized methods and techniques"? Perhaps I need to update my library.

 

[Realty Advisor]

You should to perform a segregated cost analysis on the property and then compare it to either market comparables based on sales price or market rent for reconciliation.

 

[3 Putt]

For those of you who think that the effective age is just a guess that you pull out of the air, I hope, for your sake, you never find yourself in front of your state board trying to explain how you arrived at that number!

 

[Ross (CO)]

No, Danny, I'm sure your library is one of the most-complete in your market area ! It definitely beats mine. Allow me to share two snippetts, however...

From Appraising Residential Properties, 2nd edition (1998), pgs. 326-327,pub. by the A.I. :

"Effective Age is the age indicated by the condition and utility of the structure. It is determined by an appraiser's judgment and is not a market-derivable figure. Similar buildings do not necessarily depreciate at the same rate. The maintenance standards of owners or occupants can influence the pace of building deterioration. If a building is better maintained than others in the market area, its effective age will be less than its actual age. If a building is poorly maintained, its effective age may be greater. If a building has received typical maintenance, its effective age and actual age may be the same. Effective age is related to remaining economic life. The total economic life of similar structures, minus the effective age of the subject building, equals the remaining economic life of the subject."

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If one's approach to determining Effective Age is NOT an absolute, and detailed result of mathematical calculation......then the AI should remove that second sentence as typed above. Perhaps they have by now, though, as I take this passage from a 1998 publication. And, while they say that Effective Age is "related to" REL they do not offer an elaborated focus beyond that statement. (Re-read the second sentence.) Perhaps their last sentence could have been re-written as : "The total economic life of similar structures, minus the appraiser's opinion of the effective age of the subject, would equal an expression of remaining economic life of the subject." Would a sentence written in that slightly amended way be incorrect ?

From the 4150.2, Section 405.02 - Actual and Effective Ages :

"The relationship between the actual and effective ages of the property is a good indication of its condition. A property that has been well maintained will generally have an effective age somewhat lower than its actual age. On the other hand, a property that has an effective age higher than its actual age probably has not been well maintained or may have a particular physical problem. In such cases, the lender should pay particular attention to the condition of the subject property in its review of any appraisal report that requires the appraiser to address the actual and effective ages of a property."

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Sounds a little like the 2002 Selling Guide might have borrowed some text and consideration from the AI's 1998 book, but not in any totality. The Selling Guide refers to the subject as "having" an effective age....but the "having" part is only going to come from an appraiser applying their own.....judgment, or opinion, or gut-feeling. Whether those words sound unpalatible or not is open for further discussion. I am pleased to see the Selling Guide referring to the importance of one describing the home's condition adequately, just as I suggested to Gina that she tie her Eff. Age and Condition remarks together. A poorly opined E.A. can certainly clash with one's description of condition of improvements.....especially if there is little to no text describing condition and a whopper of a number for E.A. is given.....and vice-versa.

Danny,......Neither of the sources I have quoted offers any "recognized methods and techniques". Would you please share here the exacting text passage you have within your mentioned book title, so that it can become clearer to me and others how I may have misused simple colloquial language and choice of words when conveying to Gina how she might approach her situation. I wholeheartedly consent that your library is better than mine.

Gina ?,.......So, have you reconciled your situation with that duplex yet ?

 

[Mztk1]

I learned from an instructor with a large national school that begins with an "M" that effective age is the market perception on depreciation and it must be derived from the market (BTW, that is consistent with the AI book quoted above). He says he uses this in court cases and it gives him the upper hand in displaying knowledge to judge and jury. Here is, at least how I have applied, what he said. Method #1, What you need:

1. Land Value
2. The most similar closed market sale that, whatever its age, has not been modernized in any way. Let's call it exhibit #1.

You perform a cost approach on the ex #1 and derive replacement cost new of the property, which is e.g. $120,000 including land et. al.

You subtract the actual sale price from that figures, so if SP = $100,000, you have $20,000 left over. This $20K is depreciation. You divide that $20K by the age of your property, say it is 10 years old, and you get a depreciation rate of $2K per year. You now take your replacement cost of ex #1's improvements only and divide $2,000 by that number. So, let's say the cost is $80,000, that would be $80/2K which equals 2.5%. This is your loss in percentage terms, per year. At 2.5% loss per year it would take 40 years for the house to be fully depreciated assuming nothing is ever done and so market extracted total economic life is 40 years.

Now you figure out what ex #1 is worth via the sales comparison approach, determine the replacement cost new of ex #1 with the land sale and depreciated site improvements in place, and see what you are shooting past your market value via the sales comparison approach by. Let's say for instance your market value on ex #1 is coming in a $115K with cost to replace the improvements at $90K, and the replacement cost without depreciation is saying 137K. We know we have $22,000 in depreciation against a $90K replacement cost new. That is 24.4% depreciation, divided by 2.5% per year and our effective age is ~10.

The second method is just as drawn out but it is used when you do not know land value and you have a new construction house. Enough said as I am sure you can see how to figure that one out.

I use the method when I am appraising a manufactured house for FHA and remaining economic life can become an issue with loan approval. Because, frankly, at least it is something concrete that works 90% of the time in such situations, and if the deal "dies" because I said the house had 25 years remaining I want something more than just "a gut feeling" to support my opinion.

But otherwise, I use total economic life as found in the Marshall & Swift on page E-7 and use my personal judgement on effective age.

 

[ccooper]

M&S life cycle chart

In training my appraisers, this chart in the Marshall & Swift manual has benefited us greatly. Obviously, it is still an opinion and the life cycle chart only gives approximate ranges, it is still useful.

In reviewing, I have never agreed with people who call the EA "0" after some remodeling. In my opinion, it is never brand new again. I have a hard time even believing "5" years on 20-30 year old homes that have been updated. To get to "5" again for a 20+ year old home would require a complete gutting with new wiring,plumbing,fixtures,walls,floors,etc.

hope the chart helps

 

[Thomas Fiehler]

CCoper-I agree with you in part. The portion of the house that is referred to as the bone structure (studs, slabs, etc) are depreciated at the same rate that you use for physical depreciation even though they will likely last much longer. (At least thats what I was taught back in the old days) So it is quite possible that an older dwelling that has newer plumbing, electric, along with major renovation may indeed have an effective age of say 5 years.

 

[Ross (CO)]

With all due respect here........Gina's original posting may not have portrayed any such challenges regarding land value, detrimental depreciation factors or remaining economic life. I will surmise that her quandry was what to put in that ONE field on Page 1 when she has a structure that was TWO units and with two differing ages of respective (original) construction. Her input relating to maintenance and updated conditions was quite revealing and she likely faces a simple determination of number(s) for a stated Eff. Age that will greatly reduce the actual ages that she knows for-fact.

We've all seen homes like this and can offer an E.A. of very small magnitude and requiring no dissertation, thesis or Einsteinian calculations......when a simple personal judgment or opinion is asked for. Does the word "Effective" appear anywhere else in the form pages ? What is the definition of "effective" for appraisal purposes ?....and what might an InEffecitve Age be ? I'm just wondering if anyone has those definitions. Thanks.

Gina,.....Are you still out there ? Exactly where do you need to APPLY whatever Effective Age you have determined ?

 

[Fred]

Effective age is just an opinion?!!? :new_smile-l:

My copy of The Appraisal of Real Estate details several acceptable methods for deriving the effective age of a property, but neither "personal opinion", "gut-feeling" or "based on experience" are listed. Are these "recognized methods and techniques"? Perhaps I need to update my library.

I'll bypass the issue of whether any appraisal can produce anything more than opinion and say I checked the 9th and 10th editions of that book and going from the index to the page or pages enumerated, find no "method."

 

[Mztk1]

I'll bypass the issue of whether any appraisal can produce anything more than opinion and say I checked the 9th and 10th editions of that book and going from the index to the page or pages enumerated, find no "method."

I have the 12th (and most recent )Edition and its definition of effective age is the same as the one defined in the 2nd edition above.