Total Economic Life (TEL) is the estimated amount of time that a house or any structure will contribute value to the land. TEL should not be confused with the useful life of a building; that may be much longer. The TEL calculation is important to home appraisers because it is useful in the cost approach, and it is helpful in determining if all of the pieces of the appraisal puzzle fit together to form a credible and defendable opinion of value. However, most residential appraisers pull this figure from a book and few appraisers know how to estimate TEL.
One way to calculate TEL is to use market extraction. Other methods include studies of actual mortality age or the age where major renovations take place. I will focus here on market extraction. To deduce TEL from the market, an appraiser needs the following data, which is usually included in the typical home appraisal report:
1. At least one comparable sale. This can be one or all of the same transactions used in the sales comparison approach of the appraisal. A strong comparable for TEL would have been typically maintained and not renovated. Renovating the property will extend the TEL beyond normal deterioration.
2. A site value estimate for the comparable sale or sales. This can be estimated using the same land sales used in the cost approach for the subject property if the comparable has a similar site.
3. A cost new estimate for the comparable sale. This can be the same cost per square foot as the subject property if the comparable is quite similar.
Once the data are obtained, the TEL calculation can be done in four simple steps, or a spreadsheet can be used to quickly calculate an answer. The following example uses a Portland area home (shown below) that sold for $410,000 with an actual age of 8 years.
The extraction TEL calculation is important for appraisers to understand because a reviewer or opposition appraiser in courtroom testimony could easily do the above calculations, using the original appraiser’s data, thereby demonstrating that the pieces of the appraisal puzzle do not add up correctly. Specifically, if what is said in the cost approach for a TEL does not correlate with what the sales comparables show, the credibility of the appraiser and appraisal could be in question.
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Thanks for reading,
Gary