Property cannot be rebuilt - If damaged by fire

[Ariba]

A post from another thread;

The property is zoned R-1 (single family res) and per planning officials is grand fathered in, as the zoning ordinances did not take effect until 1941 and the property was constructed prior to 1941. If damaged the property cannot be rebuilt as a MFR and must conform to the current zoning. The property is surrounded by MFR's and bound on all sides by R-2 zoning(two family). The fact that the property cannot be rebuilt as a MFR if damaged more than 50% by fire. ect..... has got me stuck. This will surely impact financing, if the appraiser performs due diligence.

Assuming that the lender requires property insurance for a minimum of the loan amount what exposure does the lender have in a situation like this? Why would the lender be concerned if the property cannot be rebuilt. The lender as no exposure since the loan amount is covered by property insurance.

Why would this have any impact on opinion of value for this property?

 

[Randolph Kinney]

The problem might be the land to improvement ratio. Insurance covers the structure however, the loan is on the total, land plus improvements. If you can't rebuild what it was insured for, the replacement cost for rebuilding what is allowable could be much higher.

 

[Couch Potato]

A post from another thread;



Assuming that the lender requires property insurance for a minimum of the loan amount what exposure does the lender have in a situation like this? Why would the lender be concerned if the property cannot be rebuilt. The lender as no exposure since the loan amount is covered by property insurance.

Why would this have any impact on opinion of value for this property?

The impact exists because your assumption is known to be false. The loan amount often exceeds the value of the improvements. No insurance is required on the land, which may be the collateral for at least a portion of the loan value. If improvements cannot be replaced, the maximum value of the property if damaged could be significantly less than it would be if the improvements could be replaced. This added risk can affect the value of the existing improvements in a variety of ways.

 

[Richard Carlsen]

Assuming that the lender requires property insurance for a minimum of the loan amount what exposure does the lender have in a situation like this?

I don't know; I'm an appraiser, not a loan officer.

Why would the lender be concerned if the property cannot be rebuilt?

Beats me!

The lender has no exposure since the loan amount is covered by property insurance.

And?..........................

Why would this have any impact on opinion of value for this property?

I have never run into a situation where it could be demonstrated that not being able to rebuild did impact value.

This is but another fine example of the appraiser worrying about something that is not his concern. If the lender wants to only loan on properties that can be rebuilt when they burn down, that's the lenders decision and business. It does not concern the appraiser. Why fill your head with trivia that matters not?

 

[Ariba]

The impact exists because your assumption is known to be false. The loan amount often exceeds the value of the improvements. No insurance is required on the land, which may be the collateral for at least a portion of the loan value. If improvements cannot be replaced, the maximum value of the property if damaged could be significantly less than it would be if the improvements could be replaced. This added risk can affect the value of the existing improvements in a variety of ways.

Good point.

However, would that not be a lender decision? There might very well be a higher risk to the lender, but they can require additional coverage. As is the case of flood, earthquake insurance? Even so, how does that effect the current use value?

 

[Oregon Doug]

I have never run into a situation where it could be demonstrated that not being able to rebuild did impact value.

This is but another fine example of the appraiser worrying about something that is not his concern. If the lender wants to only loan on properties that can be rebuilt when they burn down, that's the lenders decision and business. It does not concern the appraiser. Why fill your head with trivia that matters not?

Wouldn't that kinda depend on who your client is? Now, it's likely that a lender wouldn't care much as long as their exposure is covered, but if the client is a buyer or the owner (say, for an estate...) then I think it might matter.

If the structure could not be replaced after a fire and the site were unsuitable for an "equal" use - then wouldn't it be effectively a "taking" by the governing body?

Oregon Doug

 

[Couch Potato]

Good point.

However, would that not be a lender decision? There might very well be a higher risk to the lender, but they can require additional coverage. As is the case of flood, earthquake insurance? Even so, how does that effect the current use value?

I agree the lender makes the decision. It affects value, because it affects the available financing for purchasers. The added risk to the lender leads to higher rates, which leads to a lower price being paid for the property. Buyers purchase based on monthly payments. They will pay a certain amount per month for a house with a given utility. With two equivalent houses, a buyer will pay less for one that requires a loan with a higher rate due to higher risk.

 

[Ariba]

It affects value, because it affects the available financing for purchasers.

With two equivalent houses, a buyer will pay less for one that requires a loan with a higher rate due to higher risk.

So are you saying that you analyze the insurance requirements for each appraisal you do and make adjustments? That is way beyond my expertise or SOW.

Property insurance rates are different for the same property and depend on many criteria, among them buyers credit score, credit card payment history, passed claims by buyers, claim history on the subject property, roof material, etc. No two people pay the same for similar policies on the same or similiar properties.

Not an appraisal promblem IMHO.

 

[Rudy Canoza]

This has everything to do with HBU analysis and disclosure to the client and nothing at all to do with insurance.

 

[Rudy Canoza]

A sample rebuild letter is here...