Between a house with creaking floors and dilapidating walls and a house with pretty furniture and sturdy walls, which feels more like a home to you?
In real estate, this pretty much describes the concept of effective age.
And when buying property, this determines whether or not you’re settling for a good deal.
What Is Effective Age?
Effective age is the attributed age of a structure depending on its utility, usability, and overall quality.
This should help you determine how likely you are to spend more than the given structural cost just to have your desired quality and design.
As such, effective age reflects the true usable life of the property.
To determine this, appraisers look at the following criteria:
- Maintenance of the structure – Are there people assigned to inspect and clean the property every now and then? Are plumbing fixtures okay? Do the walls look like they’re collapsing anytime soon?
- Renovations done to the structure – Are the walls painted? Are the floors creaking? Does the overall layout look modern enough?
- Reconstructions made over the years – How many years have passed since these walls were first put up? Would you need to spend on equipment to make this look better? Does the structure look like it would need another reconstruction soon?
- Property value – Is the general vicinity of the place safe? Is it a livable site? Can businesses thrive in the area?
More often, effective age tells you about the utility and physical condition of one. In short, effective age is the age of a property based on its condition, not its actual age.
This concept is fairly easy to understand, right? But why exactly differentiates the two?
Effective Age Vs. Actual Age
Effective age could be the actual age of the structure. Or it could be more or less than the actual age.
Still too abstract for you? Check out this example.
A house built in the 90’s suburbs should look like the paints are peeling off already. Its walls are starting to cave in. And the roof looks like it’s about to disintegrate.
That is the expectation if we consider its actual age.
As a property buyer, this type of house doesn’t sound so enticing. Simply put, it doesn’t scream home.
In 2021, that house would be around 30 years old. No renovations or anything is done to it all.
Now, imagine if the same house were to completely undergo modernization: the removal of old equipment and replacing them with newly painted walls, new furniture, a new roof, new everything.
An appraiser would be impressed and estimate this house’s effective age to be shorter than its actual 30.
This piece of information should make or break the deal for a buyer like you.
Spending on properties where you’re also expected to spend on a piece of equipment to make them look better is a waste of resources.
If you don’t plan to reconstruct these properties completely, you might as well go straight into looking for a home with a lower effective age.
Remember: go for the younger buildings.
Effective Age vs. Economic Life
Another concept we can compare effective age to is economic life.
Economic life is the length of time properties may generate income. Usually, this is less than its physical life.
For appraisers, this is usually computed as the difference between the structure’s overall economic life and effective age.
This proves useful for a company looking to open up a business.
Take a Look At This
A structure may still physically exist but not be at all valuable in the market.
Following this logic, a commercial building will have a shorter life than your typical residential home.
For example, a company would usually invest in equipment to fully reconstruct and modernize properties for their own benefit. This lowers the effective age and results in longer economic lives.
And this will not only make their businesses look outwardly better. This is also the first thing investors would look at.
Remember! For investors, it’s always going to be like this: the better-looking the facade, the more trustworthy the company is.
A good fallacy to indulge in, don’t you think?
All in all, effective age should be one of the first things you look at when purchasing a property, whether it be for home or commercial purposes.
With all the added pressure of spending on equipment and renovations, structures that are considered to be old in effective age are simply not worth it.
And so, the concept will always be the same.
Whenever in doubt: the lower the effective age is, the better.