Effective Age: How “Old” Are Your Properties?
Effective age of a property refers to the amount of “usage” it has endured. In more common terms, this is the “wear and tear” a property had sustained through its existence. It is then correct to say that a property’s effective age can either be more or lesser than its actual age.
One example that could be given on how effective age can be defined is, let us supposed that you built a house way back 10 years ago. Now, in all those ten years, you cared for and maintained the house; carefully repaired the roof, the doors, the windows, and porch. Now, after ten years of its construction, with the repainting and other reconstructions done, the house still looks new. If you asked someone who doesn’t know when the house was built, you may probably get an answer of a year or two. With that unbiased appraisal, you can conclude that the effective age your house is two years.
Now, let’s take an example of the opposite of the above situation. You didn’t care for the house. You never maintained it for the last 10 years. And and now it looks like a total wreck—with holes on the roof, doors swinging wildly whenever there’s wind, and a ruined porch. You asked someone again who doesn’t know when the house was built, and the probable answer you might get is that it’s very old. Maybe 20 to 30 years. In this case, the effective age of your house has greatly pummeled to 20 or 30 years.
Taking these two situations into account, one can say that the effective age of the property highly depends on how others see it. In a way, the lower the effective age of the property, the higher would be its monetary equivalent; in contrast to a high effective age, which has a very low equivalent price.
This is how insurance companies see your properties. In order for them to have a good estimate on the effective age of your properties, they usually send “appraisers”, who are trained in the field of determining the value of different properties. These appraisers would then investigate, and try to appraise your property based on factors stated above. It is always a good idea to be thankful to these appraisers, because even though they are very annoying at times due to their questioning, you get to know the value of your estates. This data is very helpful in deciding on how much you would want to purchase on term life insurance policies and the like.
Effective age is also used in determining the depreciation of your property. If your property is damaged and you wanted to ask for reimbursement, a claim adjuster will need the appraiser’s estimated value of effective age to know how much depreciation it has undergone for the last five years or so. By checking on a table for depreciation, the claim adjusted can come up with a price that the insurance will reimburse to you.