How Effective Age & Remaining Economic Life Impact Home Values
Have you ever been shopping for homes in a neighborhood and discovered two similar looking properties that were priced completely different?
In real estate, properties age in two ways: chronologically and effectively. Chronological age is the time from when a house was built to the present day. Effective age, on the other hand, refers to how old the home appears to be and how it functions in the realm of modern day standards, codes, and amenities.
Even when properties are the same age and very close in size, their values can be heavily impacted by what is sometimes refered to as the effective age of each property. Sellers and buyers have a different way of viewing this.
The effective age is the estimate of the age of a property based on its utility, as well as its physical wear and tear.
"The effective age is the number of years that have elapsed since the property construction was complete. Effective age is simply the difference between economic life and remaining economic life of the structure. The age is evident by the condition and utility of the structure."1
The actual age is the number of years that have passed since the structure was built. Actual age is also called the Chronological Age.
The remaining economic life is the estimated number of years that an improvement will continue to contribute to property value. The remaining economic life of an improvement is the total economic life minus its effective age.
The appraiser considers effective age in any appraisal. The effective age may be the same as, more than, or less than the actual age.
Does A Home's Age Matter When Determining Value?
Generally speaking, newer homes will sell for more than older homes, but there 's an important however that needs to be addressed.
Sometimes, an older home is effectively newer than a home that was built more recently. For example, a home built in 1960 that has been gutted, retrofitted with a modern electrical system and then appointed with all the current fashions in flooring, countertops, cabinets and appliances will effectively be much newer than a home built 30 years later but never fully modernized.
So the effective age of a home is more important than the true age of a home in most instances, and that is something that we don't have to teach buyers, yet sellers typically want to fight it tooth and nail.
How Is The Effective Age Of A Home Measured?
Effective age can be defined as the impact of renovations that add to a property's useful life, thus giving the home a rebirth of sorts.
Now if you are seeking a mathematical formula for determining the effective age of a home, you're out of luck. The effective age is more conversational than mathematical, but it is very much in play when buyers are looking at homes.
If an appraiser examines a home that is 25 years old, but because of superior upkeep has the condition of an 11-year-old house, the appraiser may use the 11-year-old age as the effective age of the property.
Why Price Per Square Foot Fails The Valuation Test
One of the reasons that online valuation tools are rarely accurate is that they fail to take into account the effective age of the homes they use for data.
It's likely that the real age of two properties are the same, but clearly the effective age of a renovated home will be much "younger" than a similar property that needs updating. Simply put, the renovated unit has more life remaining than the non-renovated one. There's not a buyer in the world that would see these units as equivalent, so home sellers must learn to try and view valuations without rose colored glasses.
There is no way to apply a general (or average) price per square foot of properties in an area to one specific home. Instead, use the trend of the local average to get a feel for the direction of the market (are values rising, or are they falling?).
When it comes to a specific valuation, each home must be compared to similar homes with adjustments made for the effective ages of all homes used in the valuation.
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1. American Society of Appraisers. https://www.appraisers.org/docs/default-source/discipline_rp/dzierbicki-development-of-effective-age-estimates.pdf