Like most aspects of an appraisal, things seem easy. That is, until one takes a closer look. Age is a good example. It seems logical to think that a newer home is more valuable than an older home. However, that’s not always the case. Last week, a real estate agent asked me about how appraisers adjust for age. So, I thought this would be a good topic to discuss.
Let’s think about a home that was just built and never lived in. A brand-new home has a certain type of appeal. It has never been lived in. That usually appealing to many home buyers. Additionally, when a home is built, typically the homeowner gets to make some exciting choices about the color of the siding, the style of windows, the type of flooring they want, the type of lighting and so forth. They get to choose the upgrades, the style and layout of the home. There’s value in that.
Once the home is lived in, it can never be considered “new” again. Subsequently, a new home typically has a higher market value than one that has already been lived in. The joyful homeowner makes these choices, the home is built, and they move in. Now starts the wear and tear. The degree of wear and tear depends much on the homeowner and how well they maintain their home. With new homes, typically homeowners go for a number of years without needing to do anything major to the property. However, at some point, they will need to.
UPDATING AND REMODELING
At what point does a home start needing some updating? That depends on a lot of things. Some people can live in a home and be content not updating it for twenty-years. Others may feel like certain aspects of their home need to be updated in a shorter time. A ten-year-old kitchen and bathroom that have been well maintained, may be perfectly fine for many. Of course, a ten-year old kitchen is going to have some wear and tear from use. So, while the cabinets may be in good shape, many homeowners will eventually replace the countertops, sink and appliances with a more modern look and improved functionality. They may replace the flooring and lighting.
The same is true with bathrooms. A ten-year old bathroom may be in good condition. However, it may appear dated and may need some updating, like new flooring and perhaps a new vanity and lighting. There is also flooring and lighting throughout the home. Carpeting may need to be replaced after ten years, or less depending on the wear and tear.
As time goes by, eventually, a kitchen and bathroom update may not be enough. At a certain point, they will likely need to be totally remodeled. How about the mechanical systems? How long will a furnace and central a/c unit last? What about the water heater or other mechanical systems? At some point they will need to be replaced. With the passage of time, a home will go through numerous cycles of updating and remodeling.
How does this relate to making age adjustments you may wonder? When a home is newer, say under five to ten-year old, and going through its first cycle, I will often make age adjustments. However, after that first cycle, it becomes less clear how much value difference can be attributed to age.
Especially as homeowners update and remodel their homes to different degrees, while others not making any improvements at all. Therefore, as homes become older, generally, instead of making age adjustments, condition adjustments are utilized more often. It should be noted that both age and condition adjustments reflect differences in value that are directly related to depreciation.
The problem with making age adjustments is that age differences may not always reflect the difference in value.
There is another kind of age we look at. Effective age. Effective age is the age indicated by the condition and utility of a home. Effective age takes into consideration the wear and tear a home experiences as it relates to a loss in value, which may be attributed to physical wear and tear, functional issues and external factors that impact value.
Measuring differences in effective age is one way to measure how much one home has depreciated in value in comparison to another home. That difference is often reflected in an appraisal report with a condition adjustment or effective age adjustment rather than an age adjustment. If an effective age adjustment is made, then typically no condition adjustment would be made and visa-versa. They are reflecting the same thing generally.
Sometimes, two homes with wide age differences can have the same effective age. For instance, a thirty-year old home may have an effective age that is the same as a fifty-year old home, if the fifty-year old home has been renovated to a degree that is comparable to the younger home. If this is the case, while there is a relatively wide age gap, no age or condition adjustment may be supportable.
To better explain effective age, perhaps you have experienced what I am experiencing lately. I will meet a person, who in my mind looks older than me. When I find out that we are the same age, I think to myself, “oh no, that cannot be, can it?” Of course, they are probably thinking the same of me, and I am afraid that this is going to be more common in the years to come.
One person may be physically more healthy than another person, despite being the same age. They may be chronologically the same age, but effectively they are different.
Getting back to effective age, the effective age of a home is estimated by the appraiser. We estimate a home’s effective age by first calculating how much a home has depreciated. To do so, we need to know several things. We need to determine how much the site is worth as well as the replacement cost of the improvements. Once we know these things, we can determine how much value a home has lost. Then we can use the total economic life of the property to calculate its effective age. We also develop the effective ages of comparable sales to derive a range of effective ages, which can help to further support our estimate of the effective age of the property we are appraising.
While we take into consideration both actual and effective age in our appraisal process, if a home is not newer construction, as noted earlier, it is more typical to make an adjustment for condition or effective age rather than for chronological age.
When we do adjust for physical age, there are several ways of supporting this type of adjustment. I typically use multiple regression or a sensitivity analysis. A sensitivity analysis measures differences in the adjusted sales prices of comparable sales in order to determine a rate for the age adjustment.
There is a lot to discuss regarding actual and effective age. I just scratched the surface. I didn’t want to write a novel on the subject, and I’m sure you didn’t want me to either. Hopefully, some of this makes sense with regards to when and how appraisers make age adjustments.
- Cover photo from Upsplash
To end this post, I leave you with a little video of a family who has clearly mastered having fun while being at home. I hope you enjoy it!
Have a great weekend everyone! Be safe out there!
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Here are some links to other articles I’ve enjoyed recently! I hope you will also…
Housing Mobility Is Limited – Housing Notes by Jonathan Miller
The Best Part Of My Job As An Appraiser – Yolo Solano Appraisal Blog
80% of Home Price Appreciation Since 1990 Was Due To Falling Mortgage Interest Rates? – Real Estate Decoded
The Children of Foreclosure – The Voice of Appraisal with Phil Crawford
Why Comp Photos in Appraisals? – APPRAISAL TODAY
Birmingham Real Estate: 2019 vs 2020 – Birmingham Appraisal Blog
How much have prices risen since the bottom of the market? – Sacramento Appraisal Blog
How About Loan Conditions? – George Dell’s Analogue Blog
Thawing Out – February/March Newsletter – DW Slater Blog
Where to purchase non-counterfeit N95 masks from small U.S. manufacturers – Covid Science for Everyone