Ch 8 Flashcards
If the subject property improvement is going to depreciate on an average rate of 1.5% per year, how long would it take to fully depreciate 100%?
1.00 ÷ .015 = 67. Therefore, the total economic life of the improvement could be estimated to be 67 years. This means that an improvement that is depreciating at a rate of 1.5% per year would take 67 years to lose all of its value.
HP12: 100 Enter 1.5 % /
How to calculate Total Economic Life and adjustments for age differences with the Market Extraction Method?
- Sale Price
- Value Land
- value of Site improvements
+ depreciated value of garage/patio
= Depreciated Cost of Improvements - Cost new Improvements
- Depreciated Cost of Improvements
= Lump Sum $ depreciation - Cost new Improvements = 100%
Lump Sum $ depreciation = X
= Lump Sum % depreciation - Lump Sum % depreciation
/ Effective Age
= Average Annual depreciation rate % - Age Difference of Comp
X Average Annual depreciation rate %
= % Total - % Total
X Sale Price Comp
= $ Adjustment for Age - “1”
/ Average Annual depreciation rate %
= Total Economic Life
= Years to fully depreciate the improvements
The steps in the market extraction are:
- to calculate Total Economic Life
- to calculate $ adj for comp for age difference
- consider site improvements and garage/patio value
- Find and verify sales of similar properties that have incurred a comparable amount of depreciation
- Make appropriate adjustments such as financing and conditions of sale
- Subtract the value of the land and site improvements and add value of garage/patio to obtain the depreciated value of the improvements
- Estimate the replacement or reproduction cost of the improvements for each comparable
- Subtract the depreciated cost of each improvement from the cost new to arrive at total dollars of depreciation
- Convert the dollar estimates of depreciation into percentages by dividing each estimate of total depreciation by the cost
- Divide the total depreciation by the actual or effective age to derive an average annual rate of depreciation (this can be used to estimate the total economic life)
- 1/Avg annual depreciation rate = Total economic life
- Difference of age between comps x Avg annual depreciation rate = % total
- % total x sale price comp = $ adj for comp for age
Actual age is defined as:
“The number of years that have elapsed since construction of an improvement was completed; also called historical or chronological age.”
Effective age is defined as:
“The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age.”
Useful life of a building is defined as
“The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed.”
The concept of useful life is used when estimating depreciation of short-lived items using the breakdown method, but otherwise it has little applicability for real property appraisers.
Economic life is defined as
“The period over which improvements to real estate contribute to property value.”
Remaining economic life is defined as
“The estimated period over which existing improvements are expected to contribute economically to a property;
an estimate of the number of years remaining in the economic life of a structure or structural components as of the effective date of the appraisal;
used in the economic age-life method of estimating depreciation.”
We can divide physical defects into three categories:
Deferred maintenance Items that must be fixed right away
Short-lived components that have depreciated
Long-lived components that have depreciated
Deferred maintenance is defined as:
“Items of wear and tear on a property that should be fixed now to protect the value or income- producing ability of the property, such as a broken window, a dead tree, a leak in the roof, or a faulty roof that must be completely replaced. These items are almost always curable.”
Some items that might be classified as deferred maintenance are:
Broken window panes
Lack of railing or rotted boards on deck, steps, porches
Cracked mirrors
Electrical shorts or poor connections
Excessive chipped and peeling paint
Infestation of mice, rats, bats, insects, etc.
Leaking or full septic systems
Loose or malfunctioning gutters
Missing roof tiles or shingles
Leaking plumbing
Nonfunctioning windows and door
Removing trash, rusting machinery, old cars in yard
Dry rot in flooring in baths around toilets/tubs
Torn screens
Malfunctioning heating system
The definition of room count is:
“A unit of comparison used primarily in residential appraisal. No national standard exists on what constitutes a room. The generally accepted method is to consider as separate rooms only those rooms that are effectively divided and to exclude bathrooms.”
GLA is defined as:
“Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ)”
Porch features to include are:
Deck Gazebo Indoor or outdoor fireplace Patio Porch Screened-in patio Enclosed porch Shed or other outbuildings Pool Tennis Court Barn Boathouse Dock Extraordinary landscaping Fence Greenhouse Spa/hot tub
