Remaining Economic Life

[fishbig010]

I received good responses from everyone the last time I posted on here, so I'm here to do it again.

I am currently working on a report for a property in an area that is undergoing a $14 million dollar renovation. The property in question was recently semi-renovated after not seeing any documented renovations in 40 years. My remaining economic life I came up with was 25 years. None of these improvement were completed prior to going under contract. The house would have been better off being torn down, and a new house built. The site value is 80% of the sales comparison approach value. Based on the information I'm providing, do you think I am wrong to have come in at such a low REL? After reading numerous posts, I've seen plenty of people say to just call it 30+ years and be done with it. Others have said if an appraiser comes in at 25 years of REL, they should be castrated and burned at the stake while their whole family watches. Lets keep it civil here, and not be keyboard warriors. My explanation is as follows:

Due to the age and difficulty of determining accrued depreciation, in older homes such as the subject, estimating remaining economic life can be difficult. The subject property was on the market for 631 days prior to coming under contract, and receiving numerous updates. The subject property had no recorded or permitted updates from the time built in 1960, until 1998. The permits that were able to be seen have been attached to this appraisal. Information used for this report has been based off information from the 4 point inspection in this appraisal. A/C is new, and can expect to last ~15 years; Roofing is expected to last ~15 years for shingle, and ~10 years for flat roof; Some plumbing has been updated, but a permit was not pulled, and estimating remaining economic life based off of 3 different types of plumbing with limited access is not accurate. Copper pipes last up to ~80 years, PVC ~25-40 years, and PEX ~40-50 years. The electrical wiring has been replaced in the breaker box to cloth wiring, and the remaining life of the electrical box is ~30 years. Some windows have not been replaced, and are at the end of their economic life. The windows that have been replaced, were done without a permit, and their replacement date is unknown, making it hard to estimate remaining economic life. The replaced windows appear to be impact windows which are expected to last ~40 years if properly installed. The pool does not show any permitted resurfacing, and concrete pools are generally supposed to be resurfaced every ~10 years. The subject's foundation and exterior walls have an expected life of ~80-100 years. No defects were noted in the inspection regarding foundation. Based on the limited information available, the appraisers opinion of remaining economic life is 25 years.

What I am seeing is improvements that have a maximum life span of 20-30 years, and a market that is going through gentrification. There are no 100 year old homes in the area, and the oldest homes are going to be built in the 50's. The house across the street is a 2 story mansion built within the past 20 years, and homes in the area are either staying updated, or being torn down. This home has no interior updates to kitchen, baths, flooring, etc. The lender is really up my arse to explain why the REL isn't 30 years. I thought this information would suffice, but I was wrong. And yes, this is for an AMC. And no, I am not a trainee. I just don't know how to get updated lol

 

[James Micozzi]

I received good responses from everyone the last time I posted on here, so I'm here to do it again.

I am currently working on a report for a property in an area that is undergoing a $14 million dollar renovation. The property in question was recently semi-renovated after not seeing any documented renovations in 40 years. My remaining economic life I came up with was 25 years. None of these improvement were completed prior to going under contract. The house would have been better off being torn down, and a new house built. The site value is 80% of the sales comparison approach value. Based on the information I'm providing, do you think I am wrong to have come in at such a low REL? After reading numerous posts, I've seen plenty of people say to just call it 30+ years and be done with it. Others have said if an appraiser comes in at 25 years of REL, they should be castrated and burned at the stake while their whole family watches. Lets keep it civil here, and not be keyboard warriors. My explanation is as follows:

Due to the age and difficulty of determining accrued depreciation, in older homes such as the subject, estimating remaining economic life can be difficult. The subject property was on the market for 631 days prior to coming under contract, and receiving numerous updates. The subject property had no recorded or permitted updates from the time built in 1960, until 1998. The permits that were able to be seen have been attached to this appraisal. Information used for this report has been based off information from the 4 point inspection in this appraisal. A/C is new, and can expect to last ~15 years; Roofing is expected to last ~15 years for shingle, and ~10 years for flat roof; Some plumbing has been updated, but a permit was not pulled, and estimating remaining economic life based off of 3 different types of plumbing with limited access is not accurate. Copper pipes last up to ~80 years, PVC ~25-40 years, and PEX ~40-50 years. The electrical wiring has been replaced in the breaker box to cloth wiring, and the remaining life of the electrical box is ~30 years. Some windows have not been replaced, and are at the end of their economic life. The windows that have been replaced, were done without a permit, and their replacement date is unknown, making it hard to estimate remaining economic life. The replaced windows appear to be impact windows which are expected to last ~40 years if properly installed. The pool does not show any permitted resurfacing, and concrete pools are generally supposed to be resurfaced every ~10 years. The subject's foundation and exterior walls have an expected life of ~80-100 years. No defects were noted in the inspection regarding foundation. Based on the limited information available, the appraisers opinion of remaining economic life is 25 years.

What I am seeing is improvements that have a maximum life span of 20-30 years, and a market that is going through gentrification. There are no 100 year old homes in the area, and the oldest homes are going to be built in the 50's. The house across the street is a 2 story mansion built within the past 20 years, and homes in the area are either staying updated, or being torn down. This home has no interior updates to kitchen, baths, flooring, etc. The lender is really up my arse to explain why the REL isn't 30 years. I thought this information would suffice, but I was wrong. And yes, this is for an AMC. And no, I am not a trainee. I just don't know how to get updated lol

You just answered your own questioned in the first paragraph that you wrote (I bolded it for you ) If as you say the house should be torn down and a new house built, then: A- isn't the remaining economic life less than the 25 years you said. B- how about the HBU?

 

[ZZGAMAZZ]

I received good responses from everyone the last time I posted on here, so I'm here to do it again.

I am currently working on a report for a property in an area that is undergoing a $14 million dollar renovation. The property in question was recently semi-renovated after not seeing any documented renovations in 40 years. My remaining economic life I came up with was 25 years. None of these improvement were completed prior to going under contract. The house would have been better off being torn down, and a new house built. The site value is 80% of the sales comparison approach value. Based on the information I'm providing, do you think I am wrong to have come in at such a low REL? After reading numerous posts, I've seen plenty of people say to just call it 30+ years and be done with it. Others have said if an appraiser comes in at 25 years of REL, they should be castrated and burned at the stake while their whole family watches. Lets keep it civil here, and not be keyboard warriors. My explanation is as follows:

Due to the age and difficulty of determining accrued depreciation, in older homes such as the subject, estimating remaining economic life can be difficult. The subject property was on the market for 631 days prior to coming under contract, and receiving numerous updates. The subject property had no recorded or permitted updates from the time built in 1960, until 1998. The permits that were able to be seen have been attached to this appraisal. Information used for this report has been based off information from the 4 point inspection in this appraisal. A/C is new, and can expect to last ~15 years; Roofing is expected to last ~15 years for shingle, and ~10 years for flat roof; Some plumbing has been updated, but a permit was not pulled, and estimating remaining economic life based off of 3 different types of plumbing with limited access is not accurate. Copper pipes last up to ~80 years, PVC ~25-40 years, and PEX ~40-50 years. The electrical wiring has been replaced in the breaker box to cloth wiring, and the remaining life of the electrical box is ~30 years. Some windows have not been replaced, and are at the end of their economic life. The windows that have been replaced, were done without a permit, and their replacement date is unknown, making it hard to estimate remaining economic life. The replaced windows appear to be impact windows which are expected to last ~40 years if properly installed. The pool does not show any permitted resurfacing, and concrete pools are generally supposed to be resurfaced every ~10 years. The subject's foundation and exterior walls have an expected life of ~80-100 years. No defects were noted in the inspection regarding foundation. Based on the limited information available, the appraisers opinion of remaining economic life is 25 years.

What I am seeing is improvements that have a maximum life span of 20-30 years, and a market that is going through gentrification. There are no 100 year old homes in the area, and the oldest homes are going to be built in the 50's. The house across the street is a 2 story mansion built within the past 20 years, and homes in the area are either staying updated, or being torn down. This home has no interior updates to kitchen, baths, flooring, etc. The lender is really up my arse to explain why the REL isn't 30 years. I thought this information would suffice, but I was wrong. And yes, this is for an AMC. And no, I am not a trainee. I just don't know how to get updated lol

-----
From my novice perspective, I'm wondering whether the REL includes an inherent assumption that routine and continual preventive maintenance will be performed going forward? Or perhaps appraise the property "subject to" hypothetical condition that the renovation has been completed? Seems that yours is a very scholarly approach; and I'm just thinking aloud.

 

[Terrel L. Shields]

am currently working on a report for a property in an area that is undergoing a $14 million dollar renovation.

I need some clarity as to what that means. Are you appraising a single property undergoing a $14m renovation or is the entire area undergoing same?

R ECONOMIC L is not Remaining PHYSICAL Life. If a tear down the REL is zero, then the remaining physical life is a moot question. So. Are there other tear downs in the area? Or are people going in and completely renovating an older home? Find one or the other.

If you have a "tear down" - then the sale price plus cost to cure (demolish) is the value of the land. The buyer determined they were willing to pay that price. Several such sales is a good indicator of market value of the site. If the property isn't immediately torn down and is, remodeled, then try to find out how much they spent. Then compare that total investment with the market. Use extraction methods to determine economic life.

If the home on a lot is remodeled and they spend $100/SF and the local Replacement Cost New is $125 per SF, then the building was 80% gone. Therefore, with a 50 year life, the REL was only 10 years.

As for 30 REL , that's another of those "The UW will beat you silly because we don't want to loan on property where the REL is less than the term of the loan" - in other words, 30 years loan? They want to see 30 years life. But that's not your job. Your job is to accurately determine the REL as best you can.
This is an example of a Remaining life history of a property. @gregb posted sometime back.

 

[fishbig010]

You just answered your own questioned in the first paragraph that you wrote (I bolded it for you ) If as you say the house should be torn down and a new house built, then: A- isn't the remaining economic life less than the 25 years you said. B- how about the HBU?

Sorry, I was saying the house should have been torn down prior to the sellers replacing the roof, HVAC, etc. Since they put over $30,000 into the house, the HBU would be to either keep updating, or ride out what they have invested. It wouldn't make sense to tear down after putting in that much money. The site doesn't have any proposed re-zoning, so remaining a single family residence would be the HBU post-update.

 

[Russ Kitzberger]

It might be that REL is under 25 years, Once you account for entrepreneurial incentive and builder profit. It sounds like your area would have substantial amounts of either or both. What a complex and interesting project!

 

[fishbig010]

I need some clarity as to what that means. Are you appraising a single property undergoing a $14m renovation or is the entire area undergoing same?

R ECONOMIC L is not Remaining PHYSICAL Life. If a tear down the REL is zero, then the remaining physical life is a moot question. So. Are there other tear downs in the area? Or are people going in and completely renovating an older home? Find one or the other.

If you have a "tear down" - then the sale price plus cost to cure (demolish) is the value of the land. The buyer determined they were willing to pay that price. Several such sales is a good indicator of market value of the site. If the property isn't immediately torn down and is, remodeled, then try to find out how much they spent. Then compare that total investment with the market. Use extraction methods to determine economic life.

If the home on a lot is remodeled and they spend $100/SF and the local Replacement Cost New is $125 per SF, then the building was 80% gone. Therefore, with a 50 year life, the REL was only 10 years.

As for 30 REL , that's another of those "The UW will beat you silly because we don't want to loan on property where the REL is less than the term of the loan" - in other words, 30 years loan? They want to see 30 years life. But that's not your job. Your job is to accurately determine the REL as best you can.
This is an example of a Remaining life history of a property. @gregb posted sometime back.View attachment 49721

The 14 million dollar renovation is to the cities yacht club, in the subject's neighborhood. This has made prices in the area increase approximately 10% since they announced the renovation. Your response is the best I have seen in all the posts I browsed through before posting myself. Thank you! I saved the chart for future use!

 

[fishbig010]

It might be that REL is under 25 years, Once you account for entrepreneurial incentive and builder profit. It sounds like your area would have substantial amounts of either or both. What a complex and interesting project!

This has been very interesting to say the least. I have done numerous homes in the area, and this one takes the cake for complexity lol.

 

[George Hatch]

REL is an economic construct, not a purely physical measure. The question is "how long can we expect these improvements in this condition to contribute to the value of the whole in this location?"

Depending on the location and the composition and trends in the neighborhood, some beaters are well worth rehabbing and will have an indefinite REL.

I just appraised a 1960yb SFR in Culver City (west L.A. area) for an estate where some of the homes are being purchased for their underlying site value. That means that *in that location* those homes in Average condition have little or no contributory value to the whole. Their REL is effectively zero even though they're very much in serviceable condition. Conversely, the REL of that same structure could be indefinite if it was located just a few miles away.

 

[Michigan CG]

And yes, this is for an AMC.

Well, I hope they are paying you about $2,000 for this. Looking at your world, from my world, this would be very complex or at least a time waster. AMC people tend to be idiots pretending to know what they are doing.

Your main question is about REL which is a problem in many markets, not mine.

I admire some of your narrative, it appears you had a good mentor.

The way to support a REL is to do a cost approach on your comps and that will take at least a full day if you do it correctly. You can then support your REL. If you can derive a land value for all of your comparable sales you can estimate the depreciated cost of the improvements.

Let us say that your opinion of value is $1,000,000 and you have determined a land value of $700,000. That means the contributory value of the subject improvements are $300,000. Doing a cost approach, not on the 1004, but in narrative format, will show the total depreciation of the current improvements of your comps.

You support that with completing a cost approach on your comparables showing their land values, their cost NEW and the overall depreciation of the improvements of those properties. That give you a total estimated depreciation of the subject and thus your REL.

The Appraisal Institute has a very good Cost Approach class and you can talk to the instructor about this. The AI does not let idiots teach their classes unlike most other "education" providers.