Remaining Economic Life

[EDWARD BERRY]

I our market, depreciation is NOT straight line.

Very little in the first five years.

It CANNOT be straight line because it is a function of CARE and NOT time.

What do others find in their market.

ed in Arkansas.

 

[Mike Garrett RAA]

How big a can of worms do you want to open up?

 

[Karl]

My opinion: the Cost Approach is flawed & ignored by ALL loan personal except to check to see if all the lines are filled in & the bottom line is SLIGHTLY Higher than the Sales Comparison Approach. & that the Economic life is Slightly more than 30 as most loans will be for 30 yrs. My Opinion after a home is 5 years old Cost Approach is fill in the blanks. And just for a note
Insurance looks at the value of the home as, Actual cash value is replacement cost minus depriciation. Who else really cares about the cost approach?

 

[Austin]

Ed: Depreciation is based on a straight-line assumption but if you keep going and complete the process it will be curvilinear. Use this formula for the economic age life method or market extraction method and you will see:
First: Pick a range of houses based on age.

Sale price

-land value

=building contributory value

less replacement cost

=amount of depreciation

divided by effective age

=annual rate of depreciation on a straight line assumption

Now graph rate of depreciation on the straight-line assumption versus effective age and you will see the curve. Economic life is the reciprocal of the straight-line rate of depreciation. For example, if the annual rate of depreciation is 2%, the economic life is 50 years. If the effective age is 10 years, then the total depreciation =’s 20%.
Alternatively, you could use the art method. That house I would guess has an economic life of 50 years and based on my years of experience I would say the effective age is 10, so the depreciation rate is 20%. Same answer but which version would you believe?

 

[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.......

You know what Ida, I owe you an apology as I misread your statement. I always use a two part adjustment to reflect difference between effective age and condition.

Ida said:

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, not an uncommon occurrence to have a well care for home with outdated components which results in a bit of a complicated ratings between a higher effective age and good condition.

The opposite can also be true: a lower effective age with a poor condition rating.

Again, I am sorry for misreading your comment.

 

[Blue1]

I think Karl has a point.....nobody really cares about the Cost Approach. I've never had anyone question it. EVER! To me, estimated remaining economic life is nothing more than a shot in the dark. Too many "if's" involved to suit me. Hmmmmmmmm.......guess that's why we call it an "estimate?" Keeps Marshall and Swift in business though.......:roll:

 

[Frederick R. Ruffell]

OK,
I have read the the better part of the thread. In My Market Unless the Improvements are less than 10 years old I can see no reliable way to seperate "condition" from "effective age" short of taking an awl and crawling under the house and up into the attic and probing for termites. All the new carpet and cabinets and marble and granite and sheetrock and furnaces and vanities and toilets don't add 1 day to the life of the structure if termites have had their fill for the past several years. Or am I missing something? of course this assumes the house framing is constructed from wood.

 

[jtrotta]

To all;

have read thru most of this thread, and so I have a bit input for ya'll; in my area there are many towns in which existing dwellings date back as far as 1610 and are still not only standing, but in fine condition. The amounts of dollars paid for some of these products may even exceed current new construction. Age/Life - Economic life - dunno, if you were to look at what "contribution to the land" is the building providing, I would have to assume it is still contributing, based on some of the $$$$$$ paid for these dwellings. So, I would guess it would have a reaimining life of; 25/ 50/ 75/ 100/ perhaps another 200-400 years :?: :?:
Two things I always look for when doing these properties - M & S info. and an appraiser from the 1800's to pass along some of his/her theory on this matter :wink: .

George and others, the Profession, is actually a "practice of the profession" - similar to Attorneys who practice the profession of Law; Doctors who practice the profession of healing, this misconception has had a long life, very similar to wether our practice is a science or art, IMHO it is more of an art, due to the many variations involved and after time in the business you develop many concepts and opinion's that would not fall into the science catagory.

Lastly, enjoy the weekend, it's almost Monday again, hey which scientist thought of the two day weekend :?: Lets toastum wit the steak 8O :lol:

8)

 

[Fred]

jtrotta,
1610? Wow, in my town the oldest is only 1639 and still generating benefits and income to the owner. The fact is that surrounding economic factors kill more buildings that age - and these factors do no "accrue."

Steve Owen,
I asked,

How long would an appraiser have to live to have a database of comps that indicates a certain type of house will generate economic utility for another 50 years?

You wrote,

I had the basic information on depreciation in most areas of my market within my first three years of appraising. Using exactly the method I laid out.

Steve, You are, of course, under no obligation to answer the question – but since you took the time to snip the question out of my post - How about it?
Personally, I have seen sagging joists, spalling, subsidence and other factors progress and be remedied for periods as along as 20 years. I have never seen one built and wear out.
What would be the basis of your knowledge that the remaining economic life of a building constructed in the 1990's, with 1990's materials and technology, will be 50 years, 100 years, etc.? You surely did not have time to watch buildings built in 1990 wear out for 50 or 100 years. You have comps for how long a 1990's building will last? Is there any way someone reviewing your work can test or verify the accuracy or remaining life numbers?

The fact is that eff age/life ratios of 100/1,000 years will produce the exact same cost approach value as a ratio fo 5/50.

Forum,
The literature shows age-life applied in two ways. One is to phyisical deprecation only, and the other is to all three, as in Austin's formula. (PS, Austin, I notice that you are subtracting land value from total. Sounds like another conversation we had, but in that one you said subtracting land value could not be done because it broke up the "chemistry" of the property. Did you get a centifuge for your birthday?)

What sense does it make to include non "accruing" factors like functional and ecnomic obsolescence which tend to occur in one shot or over a short period as part of a long-term annualized percentage? For example, some external event (like factory closing or a garbage dump opening) causes a 20% reduction of value to your subject, which is 20 years old. It is a fool's errand to be accounting for this as 1% per-year.

So, as far as I can tell, not only are the remaining life figures guesses, they are being used to "accrue" non-accruing factors. Wouldn't voodoo economics be at least one step up from this?

Viva la sales comparison

 

[Austin]

Steven:
You are correct, if you subtract the land value based on a different intensity of H & BU intensity you will skew the result so you have to be aware of that. The reason you may be having trouble appreciating the age life method is that most people accept the economic age life formula but omit the market extraction part because it is to complicated to perform. The concept does not make sense without the market-extracted numbers because the economic age formula is just a means to report the numbers in an understandable form.

PS: To ignore the cost approach is to completely knock the props out from under the theory of substitution. It is kind of like me asking you to compare my car. You would ask me: "Compare it to what?" I reply; "I don't know, just compare it." There has to be an underlying point of reference or the whole appraisal process would not make sense. I think not having a point of reference is the basis of artful real estate appraising in general.