When is zero effective age justified?

[spittman]

When is zero remaining life justified?

I'm appraising a 40 year old repo. Oldest homes in the neighborhood are between 65-70 years old in average to good condition. It looks like the previous owners were doing a full rehab and started but then stopped at the first bathroom (faucet was missing). 90% of the sheetrock is complete but everything else needs to be completed, repaired or replaced. I've appraised plenty of homes with significant deterioration (and still occupied for several years thereafter), but I think this is the first where someone just stopped at the beginning of a complete renovation and now I have over thought things too much again. I guess technically someone could still live in it, so would there still be some economic remaining life or would it be zero?

 

[Mr Rex]

0 effective age would indicate a brand new house. 0 Remaining economic life is what you are describing, although I don't think what you describe equals 0 remaining economic life.

 

[spittman]

0 effective age would indicate a brand new house. 0 Remaining economic life is what you are describing, although I don't think what you describe equals 0 remaining economic life.

Yeah that's what I meant. Thanks. And I thought about it a little more and I think you are right. It wouldn't be 0.

 

[George Hatch]

Zero remaining economic life means the "as is" value is limited to the underlying site value and the improvements have zero value to anyone.


It's unlikely that's the case here. What is likely is that your typical buyer will not be the happy homeowner and the property will probably not qualify for a mortgage under conventional terms. Your most likely buyer will be a flipper and their motivation will be to make money by completing the rehab and selling it in the "as finished" condition to net a healthy profit margin.


For info, the depreciation tables in Marshall and Swift don't exceed an 80% depreciation rate for improvements regardless of physical condition. If the value of the "as finished" home exceeds the combination of site value + costs to complete + profit margin then the existing improvements have some contributory value and are not yet depreciated to zero.

 

[Ken B]

The overly simplified correct answer to the incorrectly asked question is when land value equals overall value, the improvements have reached the end of their economic life.

 

[J Grant]

Sounds like they started rehabbing but did not get far....are the kitchen and baths striped out, is it a shell? A property with kitchens and baths stripped out does not necessarily become older than other properties so this is not an age issue. It is a functional utility issue and a value issue because sounds like a property that would appeal to an investor or builder looking to buy it cheap, finish the rehab and flip, not the typically motivated owner occupant buyer ( at least per your description, or my understanding of it)

 

[Terrel L. Shields]

My thought is with Ken B - remaining physical life...no remaining economic life. "Value in use" might be to complete the rehab but if comparing that with total demolition and starting from scratch...not much different.

50 years ago there was a solid house in my front yard (my house wasn't there). At the time my brother looked at remodeling it to live it. In the end he choose to build a new house because it was going to be cheaper. The house needed jacked up for more crawl space, plumbed for indoor plumbing, rebuild the access to stairs, all new windows, siding, roofing.

Someone gave a calf for the house. There were some yellow pine full size 2 x 4's 20' long with nary a knot in them and they still exist in a house some miles away.

 

[J Grant]

If roof, windows, ext walls etc are sound and it is the interior that is stripped down to Sheetrock/drywall, most investor buyers would finish the rehab rather than demolish ( at least from what I have seen in my area)

 

[LordofTexas]

The overly simplified correct answer to the incorrectly asked question is when land value equals overall value, the improvements have reached the end of their economic life.

...what about the removal cost of the devalued improvements? Now would that make the overall value less than the current vacant lot value?

 

[Ken B]

I thought "overly simplified" was pretty explanatory and adequate in the context of the discussion.