Remaining Economic Life

[alebrewer]

View attachment 49733

Yep - I know how to do the CA given the TEL or effective age, but again - what is the methodology that M&S uses to calculate the TEL or effective age? I'm assuming the appraiser inputs the actual age and effective age, no? Where does the appraiser get the effective age?

 

[glenn walker]

Yep - I know how to do the CA given the TEL or effective age, but again - what is the methodology that M&S uses to calculate the TEL or effective age? I'm assuming the appraiser inputs the actual age and effective age, no? Where does the appraiser get the effective age?

M & S the appraiser inputs the actual age unless he was trained at Bigger Bank USA and they told me to never think about it because it is only a hypothetical and nobody ever knows what the REC really is until the day the property is no longer functional . So SON you just use 30 or 35 years and be done, because, we are not making a loan based on the value by the cost approach anyway and we know whatever you estimated the REL is nothing but a poor guess and of no use to us.

 

[George Hatch]

And what methodology does M&S use to calculate TEL?

They have said they collect the info from across the nation, in part using some of the same data sources they use to compile their costs.

If you think their TELs are unreasonable or unsupported then you probably shouldn't use their Depreciation Tables, either. Maybe you shouldn't be using their costs, either.

TO ME, their methodology makes sense in that I can (and occasionally do) apply it to different property types to similar and consistent effect. It enables me to handle a CA on both the Culver City and Inglewood properties on a consistent basis without having to hold my nose and say something I don't believe, which is what a lot of appraisers are forced to do when they're mixing their analyses.

I don't have occasion to complete a CA on an existing structure very often but when I do I put some time/effort into it. That's going to be of effect on what my analysis looks like compared to a lot of what you've been seeing.

 

[alebrewer]

He makes it up and it's 30 + years : )

Exactly my point. I've spent countless hours/years investigating the CA, along with different formulas for estimating TEL and effective age. All from investigating exponential depreciation factors, to account for the non-linear approach most homes take for physical depreciation, to applying different factors for updating vs. renovating vs. no updates. At the end of the day, assumptions HAVE to be made - otherwise it results in a circular function. IOW, you need an estimate of TEL to calculate REL/effective age, but in order to get TEL, you have to have some basis for converting depreciation into REL or effective age - it's circular. One option, as I said, is to take the reciprocal of the yearly depreciation - and that works in limited scenarios, but not well for older homes. Another option is to use promulgated estimates of TEL (via M&S or some other guide), but that's a stab in the dark. What do you do when the M&S estimate is 55 years, but your home is 70 years old?... To use the words of Turkish, "it's spurious"... (won't make sense unless you've seen the movie Snatch).

 

[alebrewer]

They have said they collect the info from across the nation, in part using some of the same data sources they use to compile their costs.

If you think their TELs are unreasonable then you probably shouldn't use their Depreciation Tables, either.

Or we could blindly accept their logic, but much like the requirement that we understand how AVM's are generated, shouldn't the appraiser have a working knowledge of how TEL estimates are generated if he/she is going to rely on them?

 

[George Hatch]

You keep conflating "physical age" with "economic life". (70 yr old home is already older than it's economic life).

That's an inconsistency in your reasoning. The economic life is how long on average a structure can be expected to contribute with little/no maintenance and updating. Not how long a property can be expected to contribute in any one specific location or when well maintained in order to slow it's decline. That's basic, and you shouldn't be just skipping over that distinction.

As for assumptions, there is no approach to value which isn't dependent on significant assumptions. So "assumptions" don't suddenly become a deal breaker just because it's the CA.

For your 70-yr old home, if the underlying site value is $100k and the value of the property in the market is $300k then what is the apparent contributory value of the improvements in their "as is" condition? And how would you explain that on a consistent basis when considering that in some locations that structure will contribute a lot more to the whole than in others? You can do that using the M&S methodology. You can't do that using most of the other methodologies I've seen appraisers use.

 

[glenn walker]

Or we could blindly accept their logic, but much like the requirement that we understand how AVM's are generated, shouldn't the appraiser have a working knowledge of how TEL estimates are generated if he/she is going to rely on them?

You keep conflating "physical age" with "economic life". (70 yr old home is already older than it's economic life).

That's an inconsistency in your reasoning. The economic life is how long on average a structure can be expected to contribute with little/no maintenance and updating. Not how long a property can be expected to contribute in any one specific location or when well maintained in order to slow it's decline. That's basic, and you shouldn't be just skipping over that distinction.

George I agree with you and I think the problem is most residential appraisers no matter how hard they try cannot separate physical and economic life. BUT in my opinion economic life only has validity on income or commercial properties. a SFR when it reaches the end of its economic life, it is near or at its end of physical life and thats when it is raised. A typical owner occupied house has no economic life and just a physical life. So in reality to estimate a economic life is just an-act of futility, and of course in the lending world they just want the life to be as long as the mortgage, so each time the house is appraised its life gets extended by another 30 years : ) LOL

 

[George Hatch]

George I agree with you and I think the problem is most residential appraisers no matter how hard they try cannot separate physical and economic life. BUT in my opinion economic life only has validity on income or commercial properties. a SFR when it reaches the end of its economic life, it is near or at its end of physical life and thats when it is raised. A typical owner occupied house has no economic life and just a physical life. So in reality to estimate a economic life is just an-act of futility, and of course in the lending world they just want the life to be as long as the mortgage, so each time the house is appraised its life gets extended by another 30 years : ) LOL

I think of physical life as being a component of the economic life. Certain elements of functionality and externalities come into play as well. IMO

Here's another example: In the desert areas (Palm Springs and others in the Coachella Valley) they're going crazy for the mid-century modern designs from the 1950s-early 1960s. These homes are objectively of fair quality construction (when they were built) and simple design, and most of them were of relatively small size. That design utterly fails in most parts of L.A., but it brings a premium in the hills or out in these areas I'm referring to. These examples clearly demonstrate that condition isn't the sole factor in estimating the accrued depreciation or the REL of the structure when in beater condition.

Another example is the grossly overimproved properties. Regardless of how you allocate the loss, the extent and rate of the overall loss is going to go much more quickly for that structure than for it's neighbors. When compared to the rate of loss compared to its neighbors when it was new vs the rate of loss when it's 40 years old those two rates will often be different. Not necessarily consistent with one another.

 

[George Hatch]

I'll mention one more thing: Regardless of which benchmark you use for TEL, if you adjust the depreciation rate to match the results will come out similarly. The reason they would come out differently would be if adjust your TEL (which is what you've been doing) without adjusting the depreciation rate to fit the same timeline.

Regardless of the value of "x", the rate of 50% of x is still 50%. Only the assumptions underlying the benchmark of "x" have changed. And yes, you can't get a benchmark for TEL without making assumptions.

 

[glenn walker]

I'll mention one more thing: Regardless of which benchmark you use for TEL, if you adjust the depreciation rate to match the results will come out similarly. The reason they would come out differently would be if adjust your TEL (which is what you've been doing) without adjusting the depreciation rate to fit the same timeline.

Regardless of the value of "x", the rate of 50% of x is still 50%. Only the assumptions underlying the benchmark of "x" have changed. And yes, you can't get a benchmark for TEL without making assumptions.

You make some good points : )