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Effective Age Versus Actual Age

An Important Appraisal Question

James Siebers    |    Property Valuation

Have you ever thought about how the components of your home contribute to the age of your home? The roof, siding, trim and windows, how long do they all last? How about the furnace and water heater? While electrical and plumbing fixtures, carpet, vinyl, flooring materials, counter tops and other interior decorating items may functionally last longer, their appearance and style may not. Replacing these items before they “wear out” will reduce the effective age of a house. Or what if you put an addition on to your home? Changing, upgrading, adding to, or replacing these items all affect the effective age of a structure.

Effective age is defined as the estimate of the age of a structure based on its utility and physical wear and tear. Effective age could be the actual age of the structure or could be more or less than the actual age, depending on maintenance, remodeling, structural reconstruction, removal of functional inadequacies, zoning change, modernization of equipment and other improvements to the structure including additions. Effective age is the age which reflects a true remaining life for the property, taking into account the typical life expectancy of buildings or equipment of its class and its usage. The effective age can be looked at as the estimate of the age of a structure not only based on the utility, but also the physical condition.

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Determining the effective age of a structure is more of an art than a science. For example, an extensively remodeled 100-year-old home that has been significantly updated could actually have an effective age of 20 years or less. Effective age is a matter of judgment, taking all factors, current and anticipated in the immediate future, into consideration.

The effective age of a property is something all homeowners and real estate professionals should know. When selecting properties that are being used as comparables in an appraisal, the effective age of each property chosen should be given consideration to ensure the comparable homes are similar in effective age. Let’s say there are two 100-year-old homes, one of which is extensively remodeled and added on to, and the other is in its original state, complete with a roll rim kitchen sink and asbestos tile roofing shingles. To compare the two properties without making an adjustment for the difference in effective age would be wrong and could have a significant impact on a home's appraised value.

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Actual age or chronological age is defined as the age of a structure (usually in years) since the building was complete.

Here are two examples that compare actual age versus effective age:

Figure 2 shows the actual age and effective age of a structure that was originally built in 1966, but with an added 500 square feet in 2006 to the original 1500-square-foot structure. The effective age is calculated using the total of the percentages of the areas multiplied by the year built of that same area.

Figure 4 shows the same structure but with additional improvements including a new roof, new kitchen and new bathroom added in 2006. In order to calculate effective age, we will assume that the improvements relative to the construction value of the home are at the following percentages: roof at 10 percent, kitchen at 15 percent and the new bath at 10 percent.

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We calculate then from the simple example that 60 percent of the house should be treated as a 10-year-old structure, while 40 percent should be treated as a 50-year-old structure. The result is a home with an actual age of 50 years old and an effective age of 22 years old.

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The examples above are just that, examples. The Life-Cycle Chart for residential property shows normal maintenance and upgrades, and also the changes to the effective age. Accurate effective age changes must take into account the effects of current local property use, maintenance, climate, neighborhood vitality, economics, zoning, turnover, etc., associated with the property in question at the time of valuation. Life cycles can extend over long periods of time or can be quite short due to excessive functional or economic obsolescence. or marketing or investor policies. The appraiser must carefully consider the property type and usage, as well as the type of appraisal and value sought before establishing a proper life expectancy and effective age.

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