Remaining Economic Life, What Say You?

[hastalavista]

IMO, the differences between the concepts of economic life and useful life are too soon forgotten after the basic courses where they are taught.

Sometimes appraisers (not the OP, I'm talking in general) struggle about old outbuildings or site amenities and how to describe them and then how to value them. Many times, these fixtures have useful life but have no (or so little, that it isn't discernible within a reasonable margin of error) contributory value. When a fixture has no more contributory value, it has no more economic life. But an old barn is used for storage; ergo, it has useful life.

Remembering the concepts of economic and useful life solves the dilemma of how to describe the fixture in the appraisal and provides the rationale for not making any adjustments:

There is an older outbuilding on the site which has zero economic life remaining (it does not contribute value). However, it has remaining useful life and is being used as a storage shed. It therefore warrants a description in the improvement section but no adjustment in the grid.
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[George Hatch]

The formula upon which the M&S depreciation tables are based function differently than the formula that is taught in the Appraisal 101 courses. Most appraisers using those tables don't realize that. And in doing so they are using those tables incorrectly.


The conventional equation is:

Econ. Life
- Eff Age * (as estimated by the appraiser)
= REL

--------------------------------
But that's not the formula you're supposed to be using when you use the M&S tables (which BTW halt their estimates of depreciation at the 80% mark, not at the 100% mark)

In MS parlance, it's

Econ. Life
- REL * (as estimated by the appraiser)
= Eff Age


The difference is that the conventional mode only takes into account the normal physical and functional elements where the M&S-endorsed approach also includes the context of the economic elements.

Interestingly enough, and the reason I favor the M&S approach is because it actually works. When you look at a 40-yr old house that's in average condition within the context of its REL instead of only looking at its physical condition you don't need to pump up the site value beyond all reason in order for the result to make some sense in conjunction with the Sales Comparison. It's particularly useful when you're looking at existing improvements that are either an overimprovement as if vacant or a gross underimprovement.


Doing "land value by injection" in a CA - which is the only mode many appraisers ever use - effectively masks several analytical sins.

 

[Terrel L. Shields]

There is an older outbuilding on the site which has zero economic life remaining (it does not contribute value). However, it has remaining useful life and is being used as a storage shed. It therefore warrants a description in the improvement section but no adjustment in the grid.

That's OK, but I see too many people simply "zero out" some very good buildings as "value in use" and clearly those buildings also contribute to the value of the overall property.

And you can be misled. I appraised a property during the crunch that was exceptionally nice and the shop building was well done, but was above and beyond... The only such home shop that I have ever appraised that had an office, a bathroom with 3 fixtures, and was centrally heated and cooled. ... The place sold several months later....cheap. But the shop was not invisible. The problem was the guy was in a terrible financial fix over some other commercial property. He gave that property back to the bank and sold this in a private deal to get out from under it for what he owed. It since resold with the buyer profiting handsomely and the shop being a good contributory item in the sale.

 

[George Hatch]

^^ that further goes to show that an isolated example doesn't indicate to a trend all by itself.

 

[Michigan CG]

good lord my op title was an abomination. meant to say whats your opinion of effective age (versus physical in the examples).

It used to be (on the old forum) you could only insert three guys banging their head against a wall in a single post. Technology is wonderful.

 

[Michigan CG]

just curious...


example 1. 80 year old house, completely gutted to the studs and rebuilt top to bottom in past year =

example 2. 14 year old condo, original in average condition =

example 3. 26 year old rambler with updates (appliances, flooring, baths, windows, hvac & roof) =

the answer is of course 5, 7 & 10.

1. I have a hard time saying anything has an effective age under 10 years when the foundation, studs, layout (think functional) and other things are 80 years old.

2. It is not possible for a 14 year-old home to have an effective age of 7 if everything is original.

3. Eh, 10 might be reasonable if everything is new but still you have to consider functionality of 26 years ago vs. what would be built today.

 

[hastalavista]

1. I have a hard time saying anything has an effective age under 10 years when the foundation, studs, layout (think functional) and other things are 80 years old.

An exception to this (and I think it would be market-specific) might be when the 80-year old home is being "restored" rather than renovated or remodeled. In such a case, the restoration to the original ("period") configuration, while not meeting the modern standards, may not suffer any functional impairments due to the historical nature of the home. A unique situation, and not the norm.

I don't see a lot of true (or 100%) restorations of Victorian homes (which would be the older homes in my markets. Although Greg probably has some old Russian hovels from the early 19th Century in his markets). Usually, the kitchen is modernized and remodeled. But I do know that they exist.

 

[George Hatch]

Like I said, I just got finished with a major rehab on a 95yr old building that went down to the framing. But it's storefront with a rectangular footprint, so functional obs wasn't an issue. Interestingly enough, one of my readers hassled me for including some physical depreciation in my CA.

What cracks me up is when I see 60yr old SFRs w/ rehabs being compared to new construction based solely on their respective condition. It's like they're not even considering the differences in floorplans, room sizes, ceiling heights and the like that occur from one era of design to another.

 

[Terrel L. Shields]

The mechanical calculation would hinge on the build up methods

Frame and foundation 80 years old (10% of cost) Remaining life? 40 years? It likely could last far longer than other parts of the house

The rest of the long term items in the house 1 year old (70% of the cost?) Remaining life 49 years?

Then you get into the short term items (appliances, CHA, etc...20±%)

What is the age? You can blend them all and come up with a number...probably a meaningless one, but you can come up with a number.

 

[Terrel L. Shields]

It's like they're not even considering the differences in floorplans, room sizes, ceiling heights and the like that occur from one era of design to another.

I never liked using old houses with new houses, they may look alike, but they are not "alike"...
Ditto using houses of different quality, and styles.

I just used some single story spec homes to comp with a 1½ story house. As best I can tell out of 60 spec lots, it is only one of two houses with a half story in the entire subdivision, and all the houses are 1,400-1,660 SF in size. I could find some half story homes elsewhere that were 40 years older and larger.