What Does Remaining Economic Life Mean?

[SAR]

My wife and I are in contract for a house that was just appraised by our lender. The report notes that the "estimated remaining economic life" is 25 years. What does this mean, exactly? Does this mean, in the appraiser's opinion, the house will not hold its worth after 25 years? And does this estimate allow for renovations/fixes that might be made in the upcoming years? Any help and clarification would be greatly appreciated. Many thanks!

 

[George Hatch]

It means that the appraiser thinks the existing structure will continue to add to the value of the whole property for at least 25 more years - assuming NO further renovations or updates from its current condition. In general, such renovations would usually extend that remaining economic life. If the house has been previously updated those prior improvements may already have effectively extended that remaining economic life. So we can't really tell from here whether the structure you're talking about is 20 yrs old or 120 yrs old - all we can guess is that it's probably still in very serviceable and functional condition at this point.

The total economic lifespan of a structure is the length of time such a structure can reasonably be expected to add value to the site within the context of its environment. The remaining economic lifespan is what's left when considering the current not-new condition, i,e; after consideration of the effects of depreciation on the value as if new. There are also economic conditions in the market that can lengthen or shorten the amount of remaining economic life because the concept is an economic one, not a physical one per se.

Long story short, it means the appraiser (probably) thinks the existing structure is somewhere around halfway through the economic lifespan for that type of structure. The number itself is meaningless except to the extent it relates to a lender's decision to offer a mortgage. The average lender would have to decide the wisdom of offering a 20yr or 30-yr mortgage on a structure with a more limited remaining economic life because the structure will ostensibly wear out before the loan is paid off.

 

[Terrel L. Shields]

The remaining economic life changes over time with renovations, remodeling, etc. Whether the property maintains value is another issue. A perfectly sound home may disappear in the face of demand for land for development. I see a lot of this to the west of Bentonville, AR where homes built new in the 1990s were abandoned along Hwy. 12 to make way for subdivisions, commercial buildings, and warehousing. Land values went from $3000 an acre to $3 a square foot in a 15 year span. The economic life was quite short for those homes overtaken by development. The physical life was another matter.

 

[gregb]

If this is a Fannie Mae loan-

Remaining Economic Life
Fannie Mae does not have any requirements related to the remaining economic life of the property. However, related property deficiencies must be discussed in the sections of the appraisal report that address the improvements analysis and comments on the condition of the property.

Fannie Mae’s appraisal report forms are designed to meet the needs of several different user groups; consequently, the report forms address the remaining economic life for the property being appraised. However, appraisers are not required to report this information. If appraisers report this information, lenders do not need to consider remaining economic life because any related property deficiencies will be discussed in the sections of the appraisal report that address the improvements analysis and comments on the condition of the property.

 

[JTip]

It means 'how much tread is left on the tires so you can drive safe or pass state vehicle inspection'.

 

[glenn walker]

The appraiser is just making up a number and make him-her prove it !

 

[glenn walker]

No appraiser is good enough too determine a hard 25 years of economic life and frankly the appraiser should be kicked to the curb and have to prove how and why he-she is that good ** I could see 25-40 years but 25 years give me a break .

 

[SAR]

Many thanks for the reply. The house was built in 1925 - the current owners are only the second owners, and have made some renovations. But, my wife and I plan on doing substantial upgrades and renovations once we move in. Again, thanks for your help, it's greatly appreciated.

 

[glenn walker]

Good luck and I wish the best for you because like I stated there is nobody good enough to determine a 5 year variance in economic life and that's why the public is so burned out on our industry *** The appraiser is and has just made up a number and I hope he-she gets into another profession.

 

[Elliott]

Houses are better than people. You can renovate, update, and remodel them and they become competitive with the rest of the market. Keeping up with the Jones ensures the property will have everlasting life.

The primary importance to the lender is that the remaining economic life is at least the same or more than the mortgage term. Its part economic theory, part real estate appraisal theory, and part accounting. The lender wants to know its not putting out money on a dog that will die too soon.