Okay guys,
I am an owner of a tree service in a very rural setting.I have been called upon to do evaluations for possible litigation.I am not a "certified" arborist bu do consider myself an arborist.I have been in the industry for over 20 years and pride myself on keeping up with the industry standards and have also persued much in self educating.
As there are no certified arborists in my area,I took the the jobs.I have perused many sites available on-line, but am stuck with the mystery of how a replacement price method can be so depreciating as to give a sum total of LESS value than the actual replacement costs.
An example is;a red maple.The formula for replacement value of a 10" diameter tree is such that if I take whole sale cost (in this area, $1,400 ) and TRIPLE it and multiply it by the species (60%) X location (40%) X and condition (80%),The end price ($806)is less than the cost of buying it.Please help/advise.
Thank You, Frank

Reply to post by Frank, on December 11, 2001 at 00:43:00:

Hi Frank.

Here's the deal. Value is "the present worth of future benefits" ususally to the owner of the tree. We can't touch or measure value, it is not a physical charateristic. So we look at other things to "indicate" value.

One approach is replacement cost. Whatever the benefits were, if we replace the tree we replace the benefits. But what if the tree is on the other side of a hill out of site from the house which is on the other side of the 10 acres and it's across a swamp full of crokagators so the owner never even walked there.... didn't know the tree was there, doesn't notice it's gone from the woods (a little roadway runs next to the tree which is at the property line and a runaway beer truck clobbered the tree). Did it have any value to the owner? Probaly not. Replacement cost overstates value.

The purpose of depreciation is to reduce the replacement cost indication of value to reflect actual benefits. In this absurd case, maybe to zero. You might have guessed that and saved the work of estimating cost. Maybe the beer distributor cleans up the mass and delivers the split firewood to the owner's house and everybody is happy.

How close is your case to this extreme? Is it at the other extreme.... it's a 100% Species in 100% Condition and very important in the landscape? Depreciation must fit the facts, not an arbitrary list of ratings.

State the facts: Replacement = $x. Doing nothing = $0. Using "typical by-the-book" depreciation value = $Y. You can try to figure out the "right" depreciation. Or maybe you state the extremes and let the parties or he court figure out what is fair and reasonable.

Take a look at my article "What is the Trunk Formula Method?" which is linked from the top of this page for a more detailed explanation of depreciation.

Reply to post by Scott Cullen, on December 11, 2001 at 00:43:00:

Thank you for the reply! And,yes I read and reread your article.It was what led me here with the knowledge that the anomalies were not unnoticed by others.
The fact that a tree can be depreciated to the point of no value is perhaps a hint that this formula is questionable.As we are talking I would wonder how it is that a material item has only the value attributed to the 'future pleasure' , a very nebulas quality.
It is with a sense of amusement that I discovered in one of the below posts that someone was made to feel foolish and appear as though he was poorly prepared when it was discovered that he had used an out of date table to calculate tree value. If the were known ,the same results could be achieved by the plaintiffs lawyer( when testifying for the defense)even if he were using the most current tables.The reason being that these calculations ,while giving the appearance of a science are so based in subjective conjecture that they could be shown to be holier than swiss cheese.
I hope that I am not offending anyone when I wonder about the qualities and intent of the lawyers who obviously helped write these theories.
Thanking you again,Frank

Reply to post by Frank, on December 11, 2001 at 07:17:50:

No, I don't think lawyers wrote the tree appraisal theory. They no doubt had a hand in shaping current real estate appraisal practice.

The fact that cost can be depreciated to zeor is NOT a fundamental problem with the formula. It may indicate that the formula was not an appropriate tool to begin with. The point is that value is by its very nature subjective. It varies by the person experiencing value. It is not intrinsic and it is not in the good being appraised. It is in the mind of the beneficiary.

Now, that should be supported by facts.

Take a 100% species and condition tree. A nice big specimen. One owner likes it and features it in the landscape... lots of value to him. A different owner want to cut it down for a swimming pool... NO value to him.

Remember we are talking about monetary value. The monetary worth of something is related to what benefits it will deliver in the future. A beat up, crummy looking car with no collectible value and 250,000 mile on it (even if it was a luxury car once) is not going to deliver much more. A fairly new, well maintained care with 25,000 miles on it even if it's a modest economy car will deliver a lot of utility in the future so it has more value today.

A book of season tickets is worth more than a single ticket to tonight's game which is worth more than a ticket to last night's game.

Go back through all these threads and you'll find a lot more interesting discussion.

Reply to post by Scott, on December 11, 2001 at 17:30:14:

Okay in the instance of the pool it is a liability,but for the homeowner who bought the property because of the trees the value is sublective but has a real value.
Perhaps the ananlogy of the car is the best.Yes it can be a jalopy,and one man's junk is anothers caddy...and when that car is junked by owner A it has very little value .But when owner B is driving down the road and is struck by another vehicle it is then assessed at blue book price.It has intrinsic value.And if that car (old as it may be) is a classic the value is IN EXCESS of blue book.Any way judging by your article and some of the posts it appears that you and I share an opinion that faults the evaluation formulas ability to justly compensate the tree owner .
The next point I would wonder about is; Does the arborist who quotes these lowball figures have any legal or moral obligation to PRODUCE the replacement tree that he has just duped the property owner by quoting such an obviously unachievable replacement cost? I for one would never quote a price that is unattainable.The client is paying me for a fair evaluation.I wonder about the professionalism of a trade that is taking money to provide a service(appraisal)to a person with little or no expertise and giving him a written statement that is in essence a lie.

Reply to post by Frank, on December 11, 2001 at 18:03:31:

There are a number of issues in your post.

First, most theoretical, value is NOT intrinsic which means unvarying. You have clearlt described that it does vary. The question is what facts tell us how it varies.

I clearly explained in the car analogy that we were excluding collectible value. It's not an antique with a demonstrable market value in excess of reproduction cost, nor even a "personal" collectible with sentimental value. Such cases can exist and value can ineed be in excess of reproduction cost. If your case fits that fact pattern you need to report and support it.

The old jalopy that owner A junked had no value to him. But owner B is driving it and it has value to her for he utility it provides in transportation. Continuing the analogy you could buy her a new Peanut Butter and Jelly coupe off the lot, but you'd depreciate that value for the age of the old one... to reflect its remaining life. If the only cost you have is for a new luxury car you'd have to depreciate even more. Maybe you could get her another thrown away jalopy just as usable for nothing, give it to her and she's whole. Or buy her a year's bus passes and save her the gas, insurance and repair expense to boot. The point is to make her whole, to replace the lost utility.

Going back to the tree if the owner doesn't even know that tree across the swamp is gone it had NO value to him. If it's in the yard and prominent maybe he desrevs a new one. Or looking to other facts you see that the old jalopy cannot be given to that girl because there's another tree growing up through the engine compartment, the shutters are hanging off the house, windows are broken and most of the trees have old storm damage snags hanging in them, that makes them too hard to cut so the owner has been using the nicer live trees for fuel for the still. So even thought that damaged tree was right there in the yard did he care about it's landscape value? Is he entitled to $4,500 for an undepreciated replacement?

The formula method has limitations. It is not good at that value component in excess of reproduction cost. It might be weak if there are not good cost data to plug in. But the principal problems are with implementation. If you listen to the "buzz" there are as many cases of appraisals overstatng vale as understating. A weakness is in interpreting the Guide or its regional supplements that depreciation can ONLY be x, y or z.

You have to go back to the basic premise of a depreciated cost approach. You start with a replacement cost indication of value. The POINT is to depreciate that figure to refelect value. So there is no obligation to replace with original cost, becasue that overstated value. You are looking for a fundamental flaw in the approach, trying to justify full replacment cost in most or all cases. That would mean depreciation is not appropriate... as a method. Professional appraisal practice and law and custom all recognize depreciation as a valid concept. The methodology is sound. An individual appraiser should be relating depreciation to facts and there is a duty to do that. To the extent the facts are not clear or there is (appraiser) subjectivity involved the amount of depreciation should not be represented to be precise but rather relative.

If an expert overstates or understaes value through a lack of skill or knowledge that is unprofessional. If the casue is bias, trying to advocate the oher side's position it is a lie. But just becasue the owner wants a gazillion dollars does not mean that would be the "fair" value.

One additional constraint is the law. Some state laws for example say explicity the value is limited to firewood. Period. Not really fair or equitable, but that's the law. If that's the case the unprofessional act is taking the money for estimating replacment cost knowing that the law won't support it.

Reply to post by Scott, on December 11, 2001 at 21:29:44:

Most of your pints are valid and well taken .Thank you.

Reply to post by Frank, on December 12, 2001 at 08:14:50:

As Scott mentioned, one limitation of appraisal formulas is the data that one puts in. Regional or state average prices published by state chapters of the I.S.A. may not fit all locations. if you can document a difrerent actual replacement cost, it is best to use that and depreciate from there rather than the regional price.

One should also consider that other factors may be included in the formula if the appraiser can document that it affects value up or down.