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Remodel - Chronological/effective ages

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Rick Neighbors

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Senior Member
Joined
Jan 19, 2002
Professional Status
Certified Residential Appraiser
State
Texas
Here is a brain teaser for you. I have an appraisal request for a "complete" remodel. Bank wants to know the value "subject to completion". This is where it gets interesting.
Original structure is pier and beam, 50+ years old, and 1154sf GLA. Owner/Contractor says he is adding 1518 sf GLA, for a total of 2672sf GLA.
The old structure is supposed to remain and they are building around it. New portion will have poured concrete slab. New roof over everything. New amenities such as central heat/air conditioning, insulation, appliances, etc.

Question: What age would you put on the grid for adjustments?
 

Don Clark

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Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
8)

I thought you were going to give us a tough one. I have done many properties similar to this, many time. I did one in norfolk Virginia where the original center portion of the house was built in 1847, the left side in the 1950's, and the right side addition in the 1970's. This is commonplace in my area. I outlined the above in the report, and in the report where chronological age is called for I put what it appeared most similar to, which was a 1950's era house, with an asteric(*), that lead to where I had exactly defined all the above. Then, for effective age I used this criteria:

I view effective age as appearing like a clock. For most average condition homes, I put 60 minutes on the clock. So, if my opinion of chronogical age was approximately the 1950's( I chose 1950). and assuming I had done the inspection today, that means, with a good rehad, modernization, or other modifications, then 52 minutes would be taken off the clock. However, if it has been rehabilitated to the point that it appears to be most similar to a 1990 built house, and understanding that the structural components have not been rehabilitated, I would put another 20 minutes back on the clock, and not being perfect, I would round to an effective age of 30. There is another way as well where you use a straight line method of depreciation for the structural components, say 20%, then use the total amount of the cost to cure, or in this case rehabilitate and modernize the non structural components. From that subtract any depreciation. Add the remainder of the depreciated value of the structural components to the depreciated value of the non structural components, add in the value of the site, and you have an opinion of value by cost approach, and a basis for the sales comparison approach adjustment for age. Many good appraisal books have examples of how to do the math on this. The "Fundamentals of Real Estate Appraisal" by Ventolo & Williams is a good source, as are many others.

Don
 

jtrotta

Senior Member
Joined
Jan 16, 2002
Don, very nice - (Ventolo & Williams) yep take that one off the shelf every once in a while :) Round here if they date back (and we have some back to the early 1600's) there usually not added onto, as they don't want to spoil the History.

Imagine, housing still standing after 402 years, and how limited we are as humans. And to think some of us only use a 50 yr to 100 yr life in the cost approach. Guess this is where the difficulty in depreciation comes in ehh 8)
 

bradellis

Member
Joined
Jan 16, 2002
Rick-

1. Go find sales where the same thing has happened.
2. Call the brokers to find out what was done to the existing portion (you already know the new addition is new)
3. Do a cost approach on the comps- YES I know you have not been in them, but make assumptions based upon what the brokers reported.
4. Figure out the value of the sites, and subtract this from the selling prices of the comps.
5. What is left is the depreciated value of the improvements.
6. Divide those by replacement cost new to get the percentage of depreciation.
7. You will then have to make an assumption about the total economic life of the subject, but that should not be very hard.
8. Apply the percentage of depreciation from the comps you did the cost approaches on.

Presto- you have a market derived estimate of total accrued depreciation for the subject. That percentage multiplied by the total economic life you chose will equal the effective age.

Note a couple of things. A) the age adjustment is for long lived incurable items and B) the condition adjustment is for condition.

Finally, do NOT forget that you must use a hypothetical condition since you KNOW that the renovation is not complete, but your lcient will almost assuredly want to know the value as of a date certain and it is normally the date you do the inspection.

Brad
 

George Hatch

Elite Member
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Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
The above are, of course, all good replies and solutions. If I may, I have $.02 to add.

The real problem in the effective age issue is not effective age at all. It's remaining economic life. The reason your client wants an effective age is so they can figure out whether the remaining economic life is longer than the proposed financing term. They don't want to put a 30-year loan on a property that is projected to only last 10 more years.

Complicating this is the use of arbritrary and fixed physical and economic life spans. Everyone knows that a 50-year or even 70-year lifespan for a structure is in may cases ridiculous as long as regular maintenance is performed.

Marshall and Swift, used by many appraisers as their cost source, addresses this issue in an unexpected way. The method for calculating effective age and remaining economic life is different in Marshall and Swift than the way most appraisers have been trained. If an appraiser is going to use M&S, including their depreciation section, as their cost source, they should also use the same method of determining depreciation.

As appraisers, most of us are taught a formula for determining effective age and remaining economic life. Marshall and Swift currently uses a different formula. Below are the two formulae:

Traditional:
Economic Life - Effective Age* = Remaining Economic Life

Marshall and Swift
Economic Life - Remaining Economic Life* = Effective Age

* = the valuers estimate.

The traditional formula requires the appraiser to use Don's "Clock Method" or some variation. And if done properly, that's certainly a valid solution. But the downside is that it addresses primarily physical elements and does not neccesarily take into account the excess functional or external elements. This forces the appraiser to add in a little extra judgement . Like I said, this is still a very valid and recognized approach.

The newer (?) method is based off of what M&S refers to as the 'extended life theory of loss, similar to the concept that a proven ability to exist leads to continued existance'. Kind of like "I am, therefore I will continue to exist"...LOL. Rather than have the appraiser estimate the effective age, the appraiser will estimate the remaining economic life for the structure, the residual being attributed to effective age. As a practical application, it allows and includes consideration of not only the physical attributes, but also design elements, neighborhood elements and market reactions.

So in application to the hybrid house described above, the appraiser using this method would use the arbritrary 55 or 65 years and subtract the estimated remaining economic life of the improvements after the rehab/rebuild. The result will be the effective age. The appraiser also gets to put these improvements into context of what is happening in the neighborhood, an element the traditional method does not directly consider. There's still some judgement involved, there's still the arbritrary 55-year economic life (which is the real villain in the process), and the resulting effective age is still a farce. But it does allow the appraiser to directly address the clients real concern - remaining economic life.

Where this variation of depreciation calculation really comes in handy is in areas subject to economic decline or redevelopment. If all the homes in a neighborhood are in what we would normally classify as "Fair" or "Poor" physical condition, yet there is no redevelopment in sight, the appraiser gets to correlate the remaining economic life with what is actually happening in the neighborhood. It is very possible that regardless of physical condition (within reason), the improvements may have a remaining economic life in that neighborhood of another 30 or 40 years. Thus, this method becomes very handy for appraisals in inner city areas from a fair lending standpoint.

The flip side of this is that a structure in average condition may have only a limited remaining economic life if the neighborhood is in transition to a different use or there are dynamic economic conditions afloat. Witness the Las Vegas hotel that was 10 years old and had 5,000 rooms that was demoed in favor of a new hotel with 10,000 rooms. Physical condition really was irrelevant to that particular remaining economic life. A residential appraisal example would be someone trying to rehab an old small home in a neighborhood where the trend is toward big new homes with modern floorplans, materials, and technology. The rehab may not be economically viable within that market.


The other advantage to using this method is that it's the same one used in M&S, so no one can really argue it with you. Matter of fact, not using it could conceiveably cause you a problem if someone decides to get technical with you for using only part of the M&S method. On a more personal note, using the current M&S methodology has made my cost approaches work a lot better, almost without exception. But don't take my word for it. Check it out in Marshall and Swift and try it for yourself.


George Hatch
 

Rick Neighbors

Thread Starter
Senior Member
Joined
Jan 19, 2002
Professional Status
Certified Residential Appraiser
State
Texas
I thank you for your excellent replys. I wish some of the classes that I have attended would have had instructors this good!
In the "your not going to believe this" department. Since I posted this question, I have another appraisal request that is a remodel over an old structure. I can't believe that this is really economically feasible, but obviously some people (and their bankers) feel that it is.
Thanks again. By the way, I got the fee at the door on both of these.
 
A

Anonymous

Guest
George Hatch said <<current M&S methodology has made my cost approaches work a lot better>>
Righto!
Regardless what cost App. software or book you use carefully doing it according to the book works much better than winging it. I see a lot of appraisers who pull numbers out of M & S and don't really understand the nuances of the whole book....

I use Boeckh software, but until I got the book down and STUDIED the classifications and the Specs, I frequently left out significant items. By going back to the book and studying it, I find my estimates can replicate the market prices quiet nicely. Residuals are often very similar to my own estimates of remaining life when you make the educated guesses required to estimate depreciation in the Boeckh system.

Ter, chicken inspector # 23 (with apologies to S. J. Perelmann)
 
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