How do appraisers account for a difference in age between comps?

There are so many factors to consider when valuing a property. Anyone who works in real estate knows this. So how do we account for a difference in age between comps? Does age matter? Should we make any value adjustments? Someone asked me this recently, so I figured it was worth kicking around the issue together. I’d love to hear your take in the comments below.

difference in year built in the appraisal report - sacramento appraisal blog

Question: How do appraisers account for a difference in year built? Do appraisers give an adjustment when to comps there is an age difference?

Answer: Here’s my take. Most of the time buyers tend to buy based on condition instead of age. Thus if there is a difference of a few years or so within a subdivision, it might not have any impact on value as long as the condition is similar. For instance, in some tracts we see an age range of 1977 to 1983. If one house was built in 1977 and another in 1983, and they are in the same condition, it’s unlikely to see the 1983 home command a value premium unless for some reason it has a higher quality or if it is located on a stronger street. Sometimes buyers are actually not even aware of the age of the home. They’re really just looking at the neighborhood and buying what is there. Do you agree?

My $500 Adjustment: I’ll admit when I first began appraising I used to adjust $500 per year on all comps in every appraisal because that’s what I was taught to do. In very technical terms, this valuation methodology is…. bogus. After all, a $500 adjustment per year certainly doesn’t apply to every neighborhood, every market, or every property type. These days though I rarely make any adjustment for year built since most of the time I’m looking at condition instead. However, if the age gap is too large, there may be a difference in value, and we we have to begin asking if we should even be comparing the homes in the first place. For instance, is 1977 vs. 1990 a good comparison? What about 1990 vs. 2003? Maybe not because we might be dealing with a different quality of construction, different tracts, or different markets. But at the same time, we might see homes in one area were built in 1955 and another nearby area has homes built in 1972. If there is no price difference observed between both areas, then the homes may easily be competitive despite their age gap. The thing we need to do though when valuing a 1955 home is to be sure to find 1955 sales instead of just 1972 sales (this helps prove the market really does pay the same amount for both ages).

Subjective Mush: I know this begins to sound very subjective, but there is no rule out there when an adjustment is needed other than when buyers at large have clearly paid more or less because of a feature. In reality it can be tempting to make value adjustments for every single distinction, but sometimes it’s best to not force adjustments by remembering the market isn’t so sensitive as to warrant a price reaction for every single difference. However, a good rule of thumb when searching for comps is to take an “apples to apples” approach. This means we start by searching for similar-sized homes with a similar age rather than choosing newer or older sales that really might not be competitive. I know this sounds basic, but when we keep the fundamentals in mind, it keeps us sharp (right?).

Brand New Homes: As I mentioned recently, we do need to be careful about comparing brand new homes with ones that are even a year or two old because brand new homes tend to sell at a price premium. This means despite only 1-2 years difference in age, we might see a pretty big difference in value.

I hope this was helpful.

Questions: Anything else you’d add? When do you think age does matter to buyers? Any stories or examples?

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Comments

  1. says

    About the only time I make an age adjustment for most Los Angeles markets is when it will narrow the range of adjusted values significantly. Most of the time ‘effective age’ is more relevant in my market. That said, there are some east coast markets where building style is tied to age and there is a definite value distinction but in the opposite direction you would assume is correct! I am sure Sacramento has several historic districts where something similar might apply.

    • says

      Good stuff, Mike. “Most of the time ‘effective age’ is more relevant in my market.” I agree with this, and that is exactly what I mean by buyers tending to pay more attention to condition than age.

  2. says

    I agree Ryan. I almost never make age adjustments, just condition, unless the subject is in a newer development where there is little difference in condition except for age. In these cases, I can usually extract an age adjustment using regression.

    • says

      Thanks Gary. I’m with you about making age adjustments. I just don’t tend to make them. I find having an informed understanding for how to look at age/condition in a market is key for the real estate community. I hope this post helps any onlookers as we think through how to approach properties – even in the most basic ways.

  3. Cynthia says

    Good post Ryan. Even “new” homes are tricky as while they often have premiums, it is also a “depends”. Often when a new home is standing inventory there is no premium as the buyer’s cannot pick their options. So is it truly an age thing or the fact the buyer’s get to chose finish options? For the majority of the new homes I do I see the “new home premium” diminish or go away for standing inventory.

    For anyone looking for a clear rule, or answer they are missing out on what we are trained to do and need to do on each and every appraisal. Read the market, how is it reacting and why. Talk to the agents on both sides and hear what they are hearing from the buyers and sellers. Confirming data from an online data source is not sufficient, we need to talk to the players and do our best to understand what the “typical” buyer/seller is thinking. Not the specific buyer, but the typical buyer and therein lies the time it takes to do a well supported report.

    Thank you Ryan for shedding light on some important issues.

    • says

      Well said Cynthia. I appreciate the comment. You’re very right that making adjustments is about what the market is willing to pay rather than what one buyer is willing to pay. There will always be one buyer who will pay more or less for whatever reason. What would most pay? That takes skill and research to discover.

  4. says

    Great points Ryan. I think sometimes we as appraisers tend to make adjustments that may not even be warranted because the market is not that sensitive. I believe this is the case for differences in age like you describe. I wish we were able to measure things so accurately but I’m not sure we can.

  5. says

    I see age as a more of home era’s. Homes built in the 1920’s do vary from those built in the 1950’s. Those built in the 50’s vary from those built in the 80’s, etc, etc based on market appeal, code requirements from the period. I rarely adjust for age unless forced to use homes from a different era than that of the subject. I am glad that Ryan has brought this up. I see some of these effective age adjustments and question the reliability. Adjustments for quality/condition seem more appropriate to me as well.

    • says

      I like your thinking Mark with age and eras. This is why 1950s homes in some of the classic areas of Sacramento just don’t seem to compete with the 1920s homes. The homes in the 20s seem to have more charm and craftsmanship, while the 50s homes have a far lesser quality. I think your point on code requirements and market appeal is critical too. Thank you.

  6. says

    Ryan – spot-on! I have worked with a number of newer appraisers that think an adjustment is needed for every little difference. It’s difficult for them to understand that sometimes the market is not sensive to every little detail. I also agree, that in most markets “condition” trumps “age” ( new construction – is a different story, however.)

    • says

      Thanks so much Tom. Well said. I agree about new construction. This whole conversation underscores the need for good training for appraisers and the entire real estate community. But even if there is good training at first, we have to always keep our eyes open since markets are constantly evolving. There is always something to learn about how value works, and that’s the fun part. I appreciate your comment.

  7. says

    Great article Ryan. As an appraiser, when I read the title my first thought was, “I very rarely make age adjustments”. Which was echoed by your thoughts. In my market, and especially along the coast, it seems to that location is where the adjustment falls more often. Dana Point has older homes in a community with beach access that are about 1.5x the price of the newer homes in the subdivision adjacent, but inland from the older homes. Same is true of Newport Beach and Laguna Beach. Location, location, location.

    • says

      Good stuff, Mark. Thanks for sharing your take. It’s easy to think newer is more valuable, but older homes probably have the best locations, and we know location is THE x-factor for value. I actually grew up in SoCal (but more inland), though My Dad lived in about all the beach cities you mentioned here at one point or another. So as a kid I spent every other weekend in Dana Point, San Juan, San Clemente, etc…. Thanks again.

  8. Greg says

    Like you guys, I was making age adjustments only based on effective age. Of course, it takes some digging to get an accurate gauge of the effective ages of the comparables, but I felt comfortable doing this.

    Then I started thinking more in terms of the life expectancy of the components, roof, hvac, electrical. plumbing, appliances. Also I started thinking about the age/life method of calculating depreciation in the cost approach.

    I’ve come to the conclusion that not making adjustments for differences in age is short-changing the younger properties where the components have a much longer remaining life.

    Please note, I am speaking mainly of the homes in the 2-15 year age range. Older properties, 30-50 years old it makes much more sense to adjust based on effective age.

    • says

      Thanks Greg. I appreciate your take. Your comment reminds us too that there is no one way to appraise. You make an adjustment for age, but I would probably look at this and consider it a condition issue. We definitely don’t want to short-change the property as you said. Thanks so much.

  9. sam says

    We are getting ready for an appraisal to do an addition to our 1860 brick home. I just noticed that the appraisal when we bought the home cited the home with a 1901 build year (date our county’s record system began).

    Is it beneficial or detrimental for me to let the new appraiser know it was built in 1860? i.e. should I keep my mouth shut?

      • says

        Hi Sam. Thanks for the comment. I guess the first thing I’m wondering is why the appraisal said 1901 if the age is really 1860. If that’s what it says in Tax Records though, then I completely get it. I would wonder if all the other pre-1901 sales in your market say the same thing in Tax Records too. It’s hard to say if it’s beneficial or not to let the appraiser know about the year built, though I certainly wouldn’t advocate hiding information. I suppose if you see a value premium for properties built around 1860, then it’s probably a good move to let the appraiser know Tax Records is incorrect. Keep in mind in many areas buyers of older homes are probably not buying based on age so much though, which means the age difference might mean very little. Obviously I don’t know your market, so that’s only a generalization. Buyers of older homes generally are buying based on era charm, architecture, and condition. If the effective age is closer to 20, obviously the property has been well maintained and will theoretically be compared to other older homes in similar condition. I don’t know your market, so it’s hard to give specific advice (obviously). Whatever you do, I recommend you focus on communicating with the appraiser about upgrades, condition, location, and other relevant information. See this post for some ideas as well as an “info sheet” you can download, fill out, and give to the appraiser. Best wishes. http://sacramentoappraisalblog.com/2014/11/18/a-cheat-sheet-of-information-to-provide-to-the-appraiser-during-a-refinance/

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