Remaining Economic Life

[Dick Hemry GAA]

A very interesting thread but, really now, how often does one do a cost approach on a property over, say 20+years actual & effective age? I would think NEVER on those 50+ year olds unless they are very special construction, etc. I do some reviews and the cost approach on some of the older houses is absurd. It's nothing more than an attempt to support a fudged sales comparison approach in some instances. Today, I sent in a review with a new grid and my opinion of value ($18,000.00) is $29,000. under original appraisers value and the place is a piece of crap but his/her cost approach exceeded his/her sales approach indication.

The cost approach becomes quite unreliable as the effective age increases as it is sometimes too difficult to defend depreciation estimates, from all causes.
Dick Hemry

 

[Tom Hildebrandt]

Maybe I did not read this thread closely enough but it strikes me that some of the posts confuse the economic life with the actual physical life. The remaining economic life must be presented in connection with a estimated total economic life, actual age is just that, the actual age of a building.

Depreciation is measured by the relationship of effective age which is measured by the remaining economic life and the total economic life. In theory, it is irrelvant how long the property might physically exist. When we seek value, an economic concept, we need to judge what the economic utility of a property is, not just how long it could physically last.

The way I view remaining economic life is to visualize how long a home, given its currrent physical state, would be habitable and suitable as a residence with out major renovations or upgrades. So a new home of good quality might last 60 years without a roof replacement (only repairs) or full kitchen refurbishing. The last 20 years of economic life would probably be as a rental, but by the time the 60 years is up, just about everything but the shell of the home would need major renovation. The rent rate for the home would barely cover the economic cost of the lot, the building would have little to no value.

A home of good quality that is actually 20 years old but which has had a new roof and kitchen and bath upgrade may have a economic life of 10 years and a remaining life of 50 years.

Homes that lasrt 100 years plus generally have had the roofs replaced (not repair) numerous times, and have undergone kitchen and bathroom upgrades and other interior and exterior renovations at least 2-3 times.
Each upgrade changes the effective age.

Those who calculate the effective age based on actual age are not really addressing the issue of the economic life.

The determination of effective age, total economic life and remaining economic age is based on judgement, and and only within broad parameters can any depreciation amounts be precisely defined for a given property.

In this regard Austin is correct, this is part of the judgement thing verses scientific proof.

Regards

Tom Hildebrandt GAA

 

[Ida S. Romo]

There are a lot of appraisers who have been taught to include effective age adjustments within the condition area of the report.......The most probable cause of this is that the concept is somewhat difficult to grasp.....or who ever mentored them did not understand the concept themselves........this is my take which is included within the addenda of my reports.......

"Physical depreciation is based on the estimated effective age of the subject, which takes into consideration improvements (ie. roof age, new windows/siding, new HVAC etc.) and other items which, generally, extend a property's effective age. Condition adjustments take into consideration the general overall condition (ie. older properties still owned by the original purchasers who have maintained the property with the utmost care). Effective age and condition are separate issues in the appraisal process. Functional and/or external depreciation, if present, is specifically addressed in the appraisal report or other addenda. "

Ida

 

[Travis McGee]

Heres a common sense method. It is specific to your area, quality, the neighborhood, etc.

1. Research homes being torn down and/or converted to higher density uses - how old are they.

2. Estimate cost new of different old homes of different quality. Then research how much have been spent on rennovation, etc. How long did it take before the cost new was exceeded?

Good luck

 

[George W Dodd]

Ida said:

There are a lot of appraisers who have been taught to include effective age adjustments within the condition area of the report.......The most probable cause of this is that the concept is somewhat difficult to grasp.....or who ever mentored them did not understand the concept themselves........this is my take which is included within the addenda of my reports.......

Every one is entitled to their opinion. There are many different roads to get to the same destination. I was taught that effective age and condition go hand in hand. Just because homes have the same physical age, rarely do they have the same effective age. Prehaps you are unfamiliar with what elements belong in which catagory? Effective age relates to long term items like the roof, remodeling, etc., whereas condition refers to short term items like carpet, painting, etc.

If the sale is properly researched then you would know its effective age and condition and adjust appropriately, otherwise your just guessing anyway.

So just because you are uneducated in a particuilar method does not mean that the method is incorrect only that your ingnorance is showing.

George W. Dodd, SRA

 

[EDWARD BERRY]

IN our market we have many builders that have built in the area for over 35 years.

It does not take rocket science to substract one of their old house sale prices from the sales price of a new one to obtain the depreciation. (structure only).

That gives a %, use 50, 55, or 60 and that caluulates effective age.

The effective age in practical work is "guessed" upon inspection.

We have found after doing over 7,000 houses in our market that if the house is maintained in reasonable fashion, the effective age is 1/3 actual age. I do a full FHA cost approach on ALL, sometimes I am correct sometimes not.

Most of my work is relo and repo.

On reviews, I find that most appraisers "tickle" the cost approach until it exceds the sales price by 5%. They forget to go back on page one and correct the effective age to match the depreciation.

Guess they do not understand the cost approach.

All this info is found in the AI course books, however many reject it.

One should should read their Article "IS The Cost Approach Revelant?"

backward ed in arkansas

 

[George Hatch]

Austin,

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.

What I'm getting from this line of reasoning is that Appraisal cannot be considered a profession until the results can be reliably verified by a third party using standardized methodology through the scientific method. First of all, I question that the use of the scientific method is a necessary or even desirable component in the definition of a profession. For instance, how do we go about using the scientific method to check the results of an attorney's work; yet are they not considered a profession? How about that of teaching or architecture? Or that of psychology or the clergy? All of these occupations are considered to be professions in our society, yet none can be judged, verified or duplicated on a scientific or mathmatical basis.

The definition of appraisal is the act or process of developing an opinion of value and the result of each appraisal is that appraiser's opinion of value. These are opinions to be developed and reported, not facts to be found. How do you propose to use the scientific method to reliably duplicate that opinion, and is it even desirable to do so? Would the work of a teacher or a clergyman be considered better or somehow more professional if it could be reduced to the cold hard facts of the universe? I submit that the people of these other occupations are no less professional in their work and recieve no less stature in our society than the engineers and scientists, the lack of "duplicatable and verifiable results" notwithstanding.

FYI, the definition of a profession makes no mention of the scientific method. You can look it up:

Profession - 1. An occupation usually requiring advanced study and specialized training. 2. The entire group of persons practicing a profession. 3. An open declaration, especially of religious faith.

Now if the definition of Appraisal ever evolves into becoming the act or process of determining value, then the results of an appraisal might have to pass the scientific test. At that point, Appraisal might become a hard science. Until then.....


George Hatch

 

[Ida S. Romo]

George Dodd,

Maybe you can enlighten me in my ignorance........

Here is the scenario......

Two ranch style dwellings equal physical age...lets say 20 years old

Ranch #1 perfectly (and I mean perfectly) maintained by its original owner, not a scratch on any wood work and the cabinets look as good as the day they were installed, and the carpeting...perfect.... avacado green shag. No new roof, No new windows.

Ranch #2 occupied by a family of five with 3 big dogs, and 6 cats who use the living room carpeting for their litter box, however, ranch #2 has new windows and a new roof.

Based on your post the differences in the above scenario would be handeled with a single adjustment because "they go hand in hand" (effective age and condition). Somehow my ignorance does not allow me to see that in the scenario posted above...Please enlighten me.

Ida

 

[Austin]

Bill Potts ask:

Austin, Have you done any depreciation studies using regression?

Reply: It is as easy as pie Bill. All you have to do is estimate the replacement cost new of the subject in the cost approach and enter it as a comparable sale age new, run the regression and the output gives you a least sum of the squares estimate of accrued depreciation per year due to age and a T statistic to tell you the significance of the result. Everybody has their own standards and maybe in the mind of some I go to extremes but I cannot live with lose ends. I could not sleep at night if I guessed at remaining economic life, guessed at effective age, or used some table from a cost manual, etc. That is just me; sorry can’t help it, was born that way.

 

[EDWARD BERRY]

George,

Would the cost to cure be a start?

In our market, it still (after curing")would not command the same price as #1, so we at least have the upper limits of depreciation.

ed in arkansas