Remaining Economic Life

[liznindy]

I was wondering if (and if so, why) the majority of appraisers estimate the remaining economic life of subject for loans other than FHA, VA.

The "Comments on Cost Approach" section of the URAR asks for the estimated remaining life for the property for HUD, VA, and FmHA but NOT for the more typical appraisal.

I do not estimate the remaining economic life (except for FHA) but give an effective age on page 1 of the report. I have never been asked by an underwriter to provide the remaining economic life on reports other than FHA.

In reviewing reports, I have found that when remaining economic life is estimated, the amount of depreciation deducted in the Cost Approach is sometimes not consistent with the stated effective age (when utilizing the age/life method of depreciation which is referenced in the report).


The Total Economic life should be a sum of the effective age and the estiamted remaining economic age, Correct??!!

 

[George W Dodd]

Liznidy,

I include the estimated remaining economic life to provide the basis for the age/life depreciation in the cost approach.

 

[Bill_FL]

You are correct with your assumption on age/life. The method I have used for depreciation is as follows:

effective age/total economic life= % physical depreciation

One of the major flaws I have with the way "we" do it as a whole is that I think we seriously under estimate the remaining econmoic life. How many do you see witha new home with a remaining eco. life of 75 years. How many 100 year old homes have you appraised. I have done many.

I dont think we serioulsy think about the differences in quality levels, etc when estimating this.

 

[Pamela Crowley (Florida)]

Bill Potts wrote:

I dont think we serioulsy think about the differences in quality levels, etc when estimating this.

I do and it makes me squirm when doing some of the new house when I see such shoddy construction (what I really think is something like 1/25). I will change the total estimated life from the set 60 years often and show what I used in the comments of the Cost Approach. such as 50/100 or 40/70 - we have few houses left here over 100 years old but doing one here is always an interesting experience.

 

[Terrel L. Shields]

I "go by the book" - using either marshal & Swift tables (found in the back and I am amazed at the number of appraisers who did not know that) and/or Boeckh residual tables.

If Boeckh says depreciation of a 5 yr house of Avg condition is .10, then 5 ÷ .1 = 50 year total life. If .05 then equals 100.

Yes, dwellings do last longer than that. But that is only because they are remodeled. Updates to Kitchen, bathroom, etc. have the effect of reducing effective age, extending total life. Don't confuse Total ECONOMIC life with Total PHYSICAL life. Components like foundation and frame will outlive the remainder of the structure. If you did not redo the roof in most cases within 20 years, the house could well be unlivable. In SF breakdown (additive method) components are given unequal ages.

IN H & B Use analysis you can argue that a dwelling that is remodeled has a new H & B Use within residential uses. Making a 2 bedroom into a 3 or 4 bedroom house is example of house whose design has changed to accomodate changing human requirements. In the 50's few people had houses that were more than 1,200 SF. By the 80's that expanded to 1,800 SF or more. Today in my area few houses are being built that are less than 1,800 Sf and most are 2,200 or more SF.

I put Total life in all reports. In narrative reports, I describe, in order; the exterior and HVAC, style, etc.; the interior including room count materials and kitchen appliances; then in a new paragraph I estimate effective age, remaining life, quality, condition, and obsolescences. Repairs needed are noted at the end.

If we look back 50 years at dwellings supposedly new then, how many had central heat and air?, 10% or less?, an attached garage, ditto; dishwasher? unheard of. 1 bath w/ tub, stool, and lavatory. Vinyl or hardwood floor, pine panel walls or painted sheetrock...in the mid-50's there was an acute shortage of sheetrock and many homes had pine panel walls or alternative wall panels, acoustic panel ceilings, asbestos-cement siding, and plain asphalt shingle roofing. All these are become uncommon in homes and even in those old homes almost all have been remodeled extensively.

Regarding the pine paneling. My mother's home has it. It is beautiful still because they mixed 1/3 linseed, 1/3 white paint, and 1/3 turpentine, coated the walls then wiped off the mixture. Sealed it with a sealer called Roz. To this day since 1955 the walls are light colored. In most homes this siding is dark as chocolate as it darkens with age.

 

[Bill_FL]

Terr,

I agree, in part. But is are we not estimating how long the improvements will contribute value to the land? I can find nothing that says this estimate is void of maintenance or updating.

 

[Austin]

This question of estimating remaining economic life is nothing but a quack-trap. The same crowd that contends that using scientific methods is a pipe dream constantly use depreciation tables from cost manuals that are nothing but statistical regression studies and or use the economic age life method which can only be extracted from market data, thus to use it before the fact is purely a perfunctory exercise used to satisfy the form requirements. To support remaining economic life from the market would require detail studies that are far beyond the scope of any residential appraisal. Dividing effective age by remaining economic life is one of the “Arts” of appraising. I will agree that filling out government appraisal forms is an ART and not a science. Kind of like the art of story telling. The real beauty is in the form and expression and not the substance of the saga.

 

[Bill_FL]

Austin,

Have you done any depreciation studies using regression?

 

[George Hatch]

Austin,

Nothing wrong with using math-centric tools to solve problems as long as you're using the right tool for the job. It is your contention that the other methods are wrong and don't work that draws a lot of disagreement. If that were the case, then no non-RA appraisal could be reasonably reliable and we would all be wasting our time. I don't know about your work, but my demonstrated hit ratio is pretty damn good. Appraising is a blend of the subjective and the objective; the art is knowing which tool to use for the job. The science is using the tool correctly.



liznindy,

The biggest weakness in the analysis of depreciation has always been the arbritrary use of a 50 or 55 year economic life span (for a house) as the starting point. Had they based it on 100 years, most of these difficulties would be avoided.


The current version of Marshall and Swift uses the following formula in their depreciation section:

Total Economic Life - Remaining Economic Life = Effective Age

If you're going to use M&S's cost data and their depreciation table, you should also use their method for quantifying effective age, which is what the table uses as the basis for the depreciation on the table. They claim it is based on an "extended-life theory of loss" (a proven ability to exist leads to continued existence) that suggests that depreciation does not accrue is a straight line, but rather in more of a curve with the loss racking up faster as the relative condition declines.

The above formula works by estimating the remaining economic life rather than estimating the effective age. In my opinion it's a better way to estimate accrued depreciation because it also takes into consideration the external factors that come into play (what's happening in that market segment) as a building ages and the decisions to remodel/redevelop are made. The whole source of difficulty is that people sometimes confuse the concept of "Total Economic Life" with "Total Physical Life". Not the same thing at all. Sure, a gas station can physically exist for 50+ years, but the economic life is estimated by M&S at only 12-15 years because after that point there are significant remodeling costs to keep the operation economically viable. Another illustration of Total Economic Life is when they demolish a 10-year old Las Vegas hotel with 5,000 rooms in favor of a new hotel with 10,000 rooms, which just happened a couple years back. You will notice the the M&S depreciation table will not depreciate a structure more than 80% of it's cost new regardless of its effective age, whereas a straight age/life calculation will.

Using this methodology (which is what M&S bases their depreciation tables on), you can also safely estimate the remaining economic life for a 75-year old SFR to be another 20-25 years or more, depending on it's physical condition and what is happening in the neighborhood. No exagerration necessary. If you're not going to use this method, you should probably not use their tables, either. In that case, you would use another method like a straight age/life mathematical calculation.

I'm sure the methods used by the other cost services also include some consideration of this concept.


George Hatch

 

[Austin]

George: I never claim other appraisal methods do not work. Conventional artistic methods obviously do work or our whole system would have collapsed long ago. I use them myself on occasion like at this very moment. My concern in all of this discussion is that using existing appraisal methods and practices we don’t know if they work or not because there is no system of verification and the method can’t be duplicated. If you do a sales grid and make ten adjustments to derive an answer and a reviewer comes along and makes one compound size adjustment and has a system of verifying his answer, then how is the conventional appraiser going to explain those 10 adjustments? The answer is he can’t. Real estate appraising has always struggled with being or not being recognized as a true profession. No true profession can exist unless the methods and procedures can be duplicated and verified by a third party. It is not a question of coming up with the right or wrong estimate price, it is a question of accountability and verifiability. There in, in my view, is the difference between an art and a science in appraising. Scientific methods can be duplicated and will sooner or later be respected as a true profession. I never was contented with the status quo and I am attempting to shake the tree to wake some people up. Sometimes tree shaking makes some people mad, but that is the price of progress somebody always has to pay.