Remaining Economic Life for a Condo?

[DonPearsall]

RELs/Wells Fargo is insisting that I place the REL in a condo report. I insisted that it is not applicable and cannot be calculated on an indiviual unit. My reasoning is that the condo is merely part of the whole project, and therefore the REL cannot be calculated, just as the cost approach cannot be calculated. The individual unit owner is not in control of how the project is maintained or managed.

Has anyone come up with a reasonable way to calculate this? I know that I could just say "30 years" and make everyone happy, but that really grates on me to just insert things to please the UWs.

 

[Brian Weaver]

I'm a big fan of "sure, its stupid...but who cares?" when it comes to silly requests from UWs. Think of it as an underwriter's binky. It keeps them happy and shuts them up.

 

[Fred]

Brian,
In one sectoin of the report you explain the scope necessary to produce a credible appraisal and in another you explain the scope necessary to produce a happy UW?

Don,

I insisted that it is not applicable and cannot be calculated

Not applicable and cannot be calcuated are almost mutually exclusive.

FWIW, I don't see any reason why it is not possible to do REL and the CA.

 

[The Warrior Monk]

FWIW, I don't see any reason why it is not possible to do REL and the CA.

Steven....doing the cost approach on the condo seems like a bit of a stretch. The principle of substitution simply does not apply.

Are you simply making the point that it can be done using "appraiser-made" numbers for a land apportionment, or is their something that I'm missing?

 

[George Hatch]

REL refers the economic life, which includes more than just the physical condition and age.

 

[Fred]

David,
I thought that would get a rise. The cost approach is always a stretch, at best. And the principle of substitution rarely applies and appraiser-made numbers are in nor short supply. So why draw the line here. That’s what I am missing, unless this is all rooted in the fact the CA is not on the “form,” which puts it outside the consciousness of many.

Maybe you have been operating from the set of assumptions so long, you don’t realize you are making them any more. And maybe I am just testing them.

You (and some others, including George) and I were in a long discussion, where I alone questioned and others supported the development of a CA in 100% built-up areas, where there is no physical possibility of building a new replacement: no vacant land and no market for land. That one stretches credibility beyond the breaking point, because such “substitution” isn’t merely “not applicable,” it’s impossible. I have seen no shortage of absurdly premised cost approaches for SFR’s, commercial property and special-use property – far more absurd than this, but still widely practiced. Of course, those types of appraisals have been reported either in narratives or on forms that made the cost approach appear necessary.

Given land availability, there is no reason why someone could not consider the option of building something instead of buying a condo - and the cost approach is supposedly not limited to exact replicas. So, to the degree that building versus buying is ever a “substitute,” that substitutability does not disappear when subject is a condo. Get enough land with enough size to support the same type of improvements, located to offer similar amenity (view, linkage to off site institutions, etc.), and add enough improvements to match property productivity (two-bed, three-bed, etc).

 

[Hal Mann]

Given land availability, there is no reason why someone could not consider the option of building something instead of buying a condo - and the cost approach is supposedly not limited to exact replicas. So, to the degree that building versus buying is ever a “substitute,” that substitutability does not disappear when subject is a condo. Get enough land with enough size to support the same type of improvements, located to offer similar amenity (view, linkage to off site institutions, etc.), and add enough improvements to match property productivity (two-bed, three-bed, etc).

Steven, I have seen you make this argument before. And I know it's merely an academic exercise because you don't have much faith in the Cost Approach as a measure of market value. I agree that the Approach is faulty in that few market participants ever really consider building as a viable option (let alone whether it's a possible option). But, assuming one does believe that the Cost Approach can be a meaningful measure of market value in general, I would argue that the substitutability does indeed disappear when the subject is a condo. The typical market pools for detached residences and condominium residences (esp the most typical type, apartments) are pretty close to mutually exclusive. As participants in either market are unlikely to consider alternatives from the other market, there is no equivalent utility. Lacking equivalent utility, the principle of substitution would not apply.

Further, to push this academic exercise to an extreme, wouldn't it make sense that if there is substitutability between a condominium apartment and a detached SFR, one might then use detached SFR's as comps for a condo in the Sales Comparison Approach?

 

[Fred]

Hal
I appreciate your thoughtful reply and consistently sound judgement. I take it, also from prior posts, you work in an office with several appraisers. That gives you a chance to bounce things off others. Like most, I think, I work alone. My days in a “shop” were pre-FIRREA. Since ca 2001, I use chat rooms as a sounding board because I simply have no one else to ask.

I don’t think it is an “academic” exercise, but “practical.” I am trying to get comfortable in finding out how much we have coherent uniform standards and how much this is 80,000 ad hoc and even whimsical opinions. I suspect the sampling of opinions, assumptions and biases represented on this forum would correlate to the opinions, assumptions and biases one might run into on a formal peer review committee (e.g. state board) – and if that is a sobering thought for me. In a practical sense, this forum offers a “dress rehearsal” of what ideas would come up in a real-life conflict of opinions.

Your post links condos to attached units. That may be common, but condo is a form of ownership, not a design. In any case -

As participants in either market are unlikely to consider alternatives from the other market,

This refers to an important idea – whether an appraisal method simulates the market’s decision-making – although, I think it is worthwhile exploring whether your statement is an assumption or a fact. Let’s take it as true and re-adjust the focus, because I am not contrasting those who are supposedly only in the condo market versus those who are supposedly on in the SFR market. The question I am asking this. Since NEITHER of those market base pricing decisions on what it would “cost” to build a new building, what makes the cost approach relevant to appraising in one market and not the other. I don’t think the answer is in the literature (or academics).

I am just trying to get a better understand on a consensus that seems to make no sense. On one hand, the cost approach is out (condos) because the market won’t calculate value that way – and yet in another case (100% built-up area), the cost approach is not automatically out, even though the market can’t calculate value that way. Isn’t that backwards? Isn’t “can’t” possibly do it a stronger barrier than “won’t?” Is there any economic principle here or just ad hoc opinions?

 

[moh malekpour]

Can this be a good way for defining REL for a condo upon lender request?
Per lender's request, the estimated remaining economic life of the subject unit was calculated as the following:
The total economic life of the subject unit based on extra ordinary assumption is +/_65 years. The current estimated effective age of unit is +/_ 20 years. The remaining estimated economic life of the subject unit is the deduction of the effective age of the unit from its total economic life, which is +/_ 45 years.