Renovations that add to a home's economic or useful life can lower its effective age.

Renovations that add to a home's economic or useful life can lower its effective age.

Effective age is a term appraisers and homeowners should know, as this number can have a noticeable impact on a home's value. So what is it?

Effective age vs. chronological age
Several things can look younger than they actually are. A restored 1967 Corvette Stingray can run like it's fresh off the lot. Plastic surgery can remove wrinkles. A home built in the mid 1900s can be renovated to have the similar amenities as one constructed within the past few years.

This is where effective age comes in. Chronological age is the time from when a house was built to the present day. On the other hand, the effective age refers to how old the home appears to be. This term encompasses the condition, efficiency and the functional utility of a property.

Effective age can be higher or lower than chronological age. For instance, if homeowners fail to take care of their properties, effective age can increase. The American Society of Appraisers noted effective age may change annually or remain the same through time.

Effective age, useful life and economic life
Lowering a home's perceived age is as simple as renovating certain aspects of the property. Similar to how a new serpentine belt and upgraded fuel injectors give new life to the Corvette, renovations that prolong the usable life of a house decrease effective age. Remodeled kitchens and bathrooms, for example, all can lower effective age because they add to a home's useful life. However, cosmetic changes have no impact. These include new furniture, rugs and curtains.

"Effective age can change annually or remain the same."

Effective age is also used in conjunction with a home's Total Economic Life—the total number of years the structure adds value above the value of the land. The formula known as the age-life method and divides effective age by total economic life. This factor is then applied to the replacement cost as determined by a cost analysis to calculate the physical depreciation.

In essence, effective age relates to value in two ways. The first is how long the home will be a livable space. The second is how long consumers will compare the subject to other homes with more or less updating.

Finding comparable properties with effective age
Effective age is meaningful in selecting comps for a valuation. Although two homes could have been built years apart—1939 and 2005, for example—renovations to the older house could mean the properties are similar based on effective age. This means appraisers could select an extensively and updated home built in 1957 as a comp for a house constructed only a few years ago.

One thing to keep in mind is the impact of effective age depends on the local market. If most homes in a neighborhood have a high chronological and effective age compared to the house to be appraised, the appraiser's opinion of value will be different from an older but renovated home in a community with a lot of new construction. Also, valuation professionals must maintain a record of all calculations for effective age and associated analyses to support their appraisal.