Remaining Economic Life

[alebrewer]

If appraising was a formula, then who needs us? TEL is an estimate, of course. After all, a new freeway proposed radically alters the TEL and isn't predictable. But observation often confirms the simple fact a house lasts about so long before it needs updated. I've been in business long enough to see a number of the early poultry farms in the area that I appraised that were new or nearly new in 1992 that are now long gone. Some taken down, some simply left vacant. And a few of them have been repurposed - usually for organic egg production. So is my estimate of the TEL of a poultry barn 25 years off by much? I stand by it. The equipment will cycle quicker but the barns are basically all gone from their original cross-ventilation, steel truss, curtain wall construction to larger solid wall, wood scissor truss construction.

The cost books tend to show total life charts that are based upon observation. And TEL is a construct, not a given. As repairs are made and updates are created, the TEL slides further into the future. An appraiser who is myopic and clueless perhaps can't understand the concept but the rest of us can and do apply it by the book. It is part of that systematic uniformity of application methodology that provides reproducible results .

Don't disagree at all, but it just reinforces my point - which is that most of which goes into the CA is subjective and can be easily manipulated - at least in the residential realm. May be different in the non-residential realm, but I doubt it. AND, given that so much is subjective, should an informed investigator ask for documentation of TEL, or documentation of effective age, most appraisers - commercial OR residential, would be at a significant loss in how to proffer said requested documentation.

Of course, the same could be said about many of the adjustments folks make in the SCA as well - but that's fodder for another conversation.

 

[Salty]

A home in shell condition that is falling apart and not habitable can still have REL as long as it adds value to the site. When determining REL, I assume no major maintenance or repairs are taking place.

 

[alebrewer]

All of the above can be extracted from market data. As I indicated, it's not always easy. It can be time consuming. But, it's doable and if you do it that way.. it's bulletproof.

I don't guess you'd be willing to share a market extracted effective age you've done recently, would you?

 

[George Hatch]

Nah. All you have to do is extract the value of the home via the SCA, then use a TEL, depreciation, and RCN that matches up to the SCA and viola! You've got a very supportable CA. Of course you always have the contributory value of site improvements that you can manipulate, should you need to fine tune the value just a bit one way or the other.

That's not how we extract our factors and expense ratios and such in the IA. Why would you assume we would need to do it that way with the CA?

I mean, sure, most of us learned how to land-value-by-I-backed-into-it for the CA when we first started out. But that doesn't mean it's impossible to actually look for land sales and do an honest land sale analysis, to yield an indication of the residual that can be attributed to the contributory value of the improvements.

We can't get to a cap rate or a GRM from a comparable sale without a sale price. Extracting that cap rate (or the depreciation rate for the improvements) from several comparables and reconciling for the prevailing rate is in no way similar using the results of an SC for a subject and arbitrarily backing into a cap rate. That would be circular. And pointless.

 

[alebrewer]

That's not how we extract our factors and expense ratios and such in the IA. Why would you assume we would need to do it that way with the CA?

Has someone had too much caffeine?

Satire: the use of humor, irony, or exaggeration to expose peoples' vices. In this case, the requirement of the use of assumptions to create a credible CA.

 

[George Hatch]

Has someone had too much caffeine?

Satire: the use of humor, irony, or exaggeration to expose peoples' vices. In this case, the requirement of the use of assumptions to create a credible CA.

Which approach to value do you develop that doesn't include the use of any assumptions?

Lookit, the CA is just another tool that's available for our use. Depending on the quality/quantity of your data it's going to work better sometimes than others. If the concept of estimating loss on an existing structure is possible at all then it's not wrong to make the attempt to approach that analysis on a methodical and consistent basis.


BTW, my CAs rarely match my SCs, even when I'm working on new construction. Similar to how my IAs seldom exactly match my SCs. It's not uncommon for them to be reasonably close, though. Both are examples of support for the efficacy of these modes of analyses. Just as an IA can be supportive of both the results and the process of an SC, the SC can also be supportive of the results and the process of the IA. And so forth. So doing the same with the CA can build confidence in those protocols independent of the original reference.

 

[alebrewer]

Which approach to value do you develop which doesn't include the use of any assumptions?

you mean unsupported assumptions? The SCA... (and the IA, at least insofar as most of the assumptions in the IA would be similar to those made in the SCA)

But before you rebut, I do understand your point. I have literally spent years trying to distill a CA model that reflects market actions, both with respect to site value estimation (extraction), TEL, depreciation, etc. There is just no way to do it without: (a) creating circular arguments, or (b) making some (sometimes) VERY unsupported assumptions. Hence my general disdain for the CA. That said, I know there are folks who swear by the validity of the CA, and who am I to try to dissuade anyone from their opinion(s)?

One example of a circular argument: extraction is basically a 'backwards' CA, no? You start with the EMV and end up with the site value, whereas in the forward CA you start with the site value and end up with the EMV. If you have a good idea of the site value beforehand, you can drill down on the RCN factor pretty accurately. However, in order to find the site value, you need to have a good idea of the RCN - hence the circularity of the argument. Of course the response would be that cost manuals DO have accurate RCN factors - I, however, would disagree. Or at least distilling them to their 'accurate' form takes so much manipulation (in the sense of local building factors, etc.) that the distillation becomes meaningless.

 

[George Hatch]

"However, in order to find the site value, you need to have a good idea of the RCN - hence the circularity of the argument." ​

This is a spectacularly inaccurate observation. Moreover, if it's EVER possible to do otherwise then that negates both your comment and the reasoning behind it.

We've gone over this before. I never use land-value-by-I-backed-into-it unless it is literally a last resort, which (in this region) is seldom actually the case. TBH, I can't remember the last time I had to stoop that low. Not counting any CAs I've done in 2020, I've done 21 land appraisals this year (I'm working on another one this week) and I haven't had to resort to land value by extraction for any of them. Urban, suburban, rural - it's the same process. Some are just harder to do than others.

So no, you don't need RCN factors to get to a site value prior to estimating RCN. If you have a supportable opinion of site value then the residual is the residual.

 

[alebrewer]

"However, in order to find the site value, you need to have a good idea of the RCN - hence the circularity of the argument." ​

This is a spectacularly inaccurate observation.

We've gone over this before. I never use land-value-by-I-backed-into-it unless it is literally a last resort, which (in this region) is seldom actually the case. TBH, I can't remember the last time I had to stoop that low. Not counting any CAs I've done in 2020, I've done 21 land appraisals this year (I'm working on another one this week) and I haven't had to resort to land value by extraction for any of them. Urban, suburban, rural - it's the same process. Some are just harder to do than others.

So no, you don't need RCN factors to get to a site value prior to estimating RCN. If you have a supportable opinion of site value then the residual is the residual.

Spectacularity aside - although I do admire your use of hyperbole to denigrate others - how do you perform extraction, good sir? The below is taken from The Appraisal of Real Estate, which I assume you've at least heard of?

And I quote: "extraction: A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land." Or to put it in the terms I mentioned, you start with the EMV and end up with the site value. Kind of the same thing, no? Now, in order to find the depreciated cost of the improvements, you'll need to know the 'undepreciated' cost of the improvements (RCN) as well as the depreciation, or am I being spectacularly inaccurate again?

Now that you mention it, it does sound rather spectacular.

 

[George Hatch]

Like I said, I almost never do it. Land value by extraction is a last resort. I'll go ahead and do it if that's all there is but I haven't found that to be the case very often. That you seem to defer to the method in this discussion is (IMO) a problem all by itself. Just because there are a lot of donkeys who shortsheet the bed that way doesn't mean that's the only way for anyone to do it.

Set all that aside and lemme ask you this: If you can develop an opinion of site value that's independent of the sales of any improved properties then do you really think you're unable to apply that site value indicator to your improved sales to extract the contributory of their respective improvements packages?

I'll make it easy for you: What do you do for site values when your subject is proposed construction out in the rural areas? Surely you don't just skip all attempts to look for land sale data and instead revert to "extraction"? Moreover, if you can EVER develop an opinion of site value on your own and if you can EVER extract the contributory of the improvements then that demonstrates the application and that mode of analyses, even if you don't think its always possible to do so in all situations.

Lack of the data you want in any particular assignment doesn't undermine or disprove the legitimacy of that mode of analyses or the concepts involved in it.