Sales Comparison Grid & Cost to Cure

[alebrewer]

Adjusted sales prices must be equal seems to belong to you only, I never see it in any text books and it does not sync with peer practice and peer practice is a standard of USPAP.

Adjusted sales prices 'should' be equal - if all nuances of the transactions can be captured and accurately adjusted. Of course, this is seldom the case, but it is the goal (or should be) nonetheless.

 

[TekJ42]

As I read it, you didn't complete the assignment per the terms of the engagement and you didn't provide a competently developed "as is".

From the client's perspective you didn't complete the assignment competently, and based on your questions it appears you weren't competent to develop an "as is" because you're here asking people how to do it and challenging some of the responses.

There's no point in getting fragile over a lender offering suggestions on how to solve a situation that you didn't solve in your report. We wouldn't take it personally if a borrower or a broker did it; we would just blow it off and proceed to do what we are supposed to do.
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In any case, here's the answer on the "how to": The typical buyer for this property who would have closed their sale as of that date and with the structure in that "as is" condition might not even be an owner-user and that property might not even qualify for SFR financing at premium terms. The buyer might be a contractor or investor who will intend to complete the roof and flip the property for a profit. So no, "cost to cure" will probably not cover the market's reaction to those conditions. You should anticipate to find a discount consisting of "cost+contingencies+profit" which will exceed the cost to cure.

The way you would develop such a discount would be to START with the costs and then figure out what such investors expect in terms of profit. One way to do that would be to find flips where you can figure out what the difference was between the initial acquisition vs the subsequent resale. Figure out how much they spent - aka the costs - to do the rehab/remodel. From there, the equation amounts to [resale price - (acquisition+costs) = profit margin]. Find several examples of heavy fixers or flips to find the before/after and figure out how much these investors expect. If they spend $5K to fix a cracked slab or redo the finish on a pool then how much extra beyond that $5K do they clear upon resale?

You're not looking for direct comps for your SC grid; you're looking for matched pairs (beater vs finished) from which to extract the adjustment factor. Then you import the adjustment factor in for use with the direct comps in your SC grid.

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BTW, all RE is local; but in my region the discounts frequently amounts to "cost x 2". If they spend $75k on a remodel they expect to clear another $75k to offset their contingencies, their nobody-works-for-free and their opportunity costs for whatever resources it took to acquire, hold and market the project. If the roof is the only element and the cost is less than $5k then - based on what I've seen in the past - I would anticipate the discount to be more than cost x 2 due to the small cost involved, so perhaps cost x3 or cost x4.

Regardless of the above, you need to look at the market data for fixers and develop your own opinion as opposed to taking our word for anything. You're trying the emulate the market's reaction to these attributes, not ours'.

Thanks for your response. See below for the actual revision commentary included in the report:

REVISION 10/03/2023:

The extraordinary assumption of the roof completion does not correlate with an As Is assessment. The value is still predicated on a future, not a current and as is, condition. Please indicate a cost to cure and account for any cost to cure within the analysis in order to provide a true As Is assessment. Please revise as needed.

RESPONSE:

Cost to cure added as a lump sum to the cost approach. $------- represents the cost to complete the work to the roof since the work is already partially completed (old roof removed, new underpayment, new braces, roofing material on-site ready to be installed).

There are no comparable sales with partially installed roofs from which to extrapolate the partial installation of the roof's contributory value. Any market participant who purchased the property would see that the roof was under construction / actively being replaced and include its completion as a condition for sale. Since no data in the market is present to specifically determine the contributory value of the roof's partially installed condition, no supportable adjustment can be made in the sales comparison grid.

The appraiser is not a licensed contractor, home inspector, or professional roofer. Costs to cure are rough estimates based on general market knowledge. A licensed home inspector, general contractor, or professional roofer should be consulted for a more detailed and precise estimate of the cost to complete the installation of a partially replaced tile roof at the subject.

REVISION 10/04/2023:

we need the cost to cure to be reflected in the sales comparison approach and in the value if appropriate

RESPONSE:

Changed condition rating for subject to C4 to reflect the lack of a finished roof covering and changed condition adjustments to all comparables. Note that the rest of the property is considered C3 condition. Note that the adjustment is reflective of a general condition deficiency present at the subject due to incomplete roof replacement / construction.

Note that the value opinion stated in this report was decreased from $------ to $------- to reflect the contributory value of the condition: unfinished roof. The subject's roof replacement is unfinished as of the effective date of this report. Finished roofing is a normal attribute in the subject's immediate neighborhood, and the unfinished state of the roof is likely a violation of county and HOA regulations.

Note that the condition of the subject was adjusted only to reflect the condition of the roof, and this was only done to fulfill an assignment condition.

The value opinion stated in this report is based on the hypothetical condition that the roof was severely damaged or otherwise contributed to the overall condition of the property in a manner that is consistent with a general C4 condition. The use of this hypothetical condition influenced assignment results. This statement is included for compliance with USPAP.

Modified language related to physical deficiencies and adverse conditions pertaining to the unfinished roof based on the hypothetical condition that the roof was severely damaged in a way that negatively influenced the overall condition of the subject to C4. The use of this hypothetical condition influenced assignment results. This statement is included for compliance with USPAP.

Modified language in the condition of the property related to the condition of the roof based on the hypothetical condition that the roof was severely damaged in a way that negatively influenced the overall condition of the subject to C4. The use of this hypothetical condition influenced assignment results. This statement is included for compliance with USPAP.

Modified language in reconciliation section to reflect change in weighting of comparables.

Removed language related to roof replacement extraordinary assumption from addendum.

 

[TekJ42]

From the client's perspective you didn't complete the assignment competently, and based on your questions it appears you weren't competent to develop an "as is" because you're here asking people how to do it and challenging some of the responses.

I am challenging the responses. My opinion is that cost based adjustments do not belong in a comparative analysis - so I wanted to see what other appraisers thought about this. I think the lender / client is wrong to insist that we provide adjustments of this type in the sales comparison grid, but was open to the possibility I was incorrect. Requesting and challenging other appraisers perspective seemed like a good way to determine whether I was correct. So far I have not read a response that justifies the use of cost based adjustments in a comparative analysis - only criticism, capitulation, and alternatives. The alternatives seemed most reasonable to me, which is why I elected that methodology.

I do appreciate everyone's input though - even the negative. If I can defend my work against you all then I figure I could defend it against the board.

 

[Surf Cat]

The AMC says if we refuse they will have to re-order the appraisal and pay for it out of their own pocket.

You can relax now OP. With the cockamamie way you decided to go about making things right, the AMC surely has another appraiser on the way.....out of their own pocket.

Requesting and challenging other appraisers perspective seemed like a good way to determine whether I was correct.

Nope

 

[J Grant]

I am challenging the responses. My opinion is that cost based adjustments do not belong in a comparative analysis - so I wanted to see what other appraisers thought about this. I think the lender / client is wrong to insist that we provide adjustments of this type in the sales comparison grid, but was open to the possibility I was incorrect. Requesting and challenging other appraisers perspective seemed like a good way to determine whether I was correct. So far I have not read a response that justifies the use of cost based adjustments in a comparative analysis - only criticism, capitulation, and alternatives. The alternatives seemed most reasonable to me, which is why I elected that methodology.

I do appreciate everyone's input though - even the negative. If I can defend my work against you all then I figure I could defend it against the board.

You didn't simply challenge the responses about C2C as the adjustment - you were all over the place about HC and why it can not be done as is , and the idea that it is akin to a severely damaged roof.

It sounds like you still have not delivered an AS IS appraisal if you left that CYA statement in about a HC-

Please do not twist people's words around. Nobody told you yes make a cost as the adjustment or do it because the lender told you to. People were offering different thoughts on it - and btw I have seen many, many appraisers post here they use C2C as the adjustment And I have called them out about it - it is a legit adjustment if the appraiser also feels it is the market reaction,- many times there is no market reaction for a minor cost to cure.

 

[TekJ42]

You didn't simply challenge the responses about C2C as the adjustment - you were all over the place about HC and why it can not be done as is etc

It sounds like you still have not delivered an AS IS appraisal if you left that CYA statement in about a HC-

And please do not twist people's words around. Nobody told you yes make a cost as the adjustment or do it because the lender told you to. People were offering different thoughts on it - and btw I have seen many, many appraisers post here they use C2C as the adjustment And I have called them out about it - it is a legit adjustment if the appraiser also feels it is the market reaction,- many times there is no market reaction for a minor cost to cure.

Noted and appreciated.

 

[Mark K]

So far I have not read a response that justifies the use of cost based adjustments in a comparative analysis -

Is it your contention that the all of the adjustments in the sales grid must be based on comps? I think a lot of appraisers would disagree.

In your case, you'll need to find comps with tile shingles piled on the roof to make a supportable adjustment. (BTW, I was just in the Ft. Meyers/Punta Gorda area and saw a LOT of homes with shingles piled on the roofs and nobody was doing any installing.)

Making an adjustment for C2C in the sales grid based on an cost estimate (including profit and EI) is a longstanding and widely accepted method. Oftentimes, it is the only reasonable approach.

 

[TekJ42]

Is it your contention that the all of the adjustments in the sales grid must be based on comps?

Yes. Sales comparison approach is (should be) based on market reaction to differences in attributes. Some appraisers apparently do disagree - with varying levels of snark.

 

[Mark K]

Yes. Sales comparison approach is (should be) based on market reaction to differences in attributes. Some appraisers apparently do disagree - with varying levels of snark.

Many 'market reactions' are based on nothing more than cost. Call it what you will, but cost is the driving factor.

 

[Terrel L. Shields]

So.. this Lender never makes loans on proposed dwellings?

Again, the FDIC requires an AS IS value in addition to the P & S value estimate. ALWAYS.

I am challenging the responses. My opinion is that cost based adjustments do not belong in a comparative analysis

You certainly didn't learn that from a textbook. In fact, you had to ignore it...if you own an appraisal textbook. If you do, wipe off the dust and go to the adjustment sections were it will explain that adjustments can be "cost-related"...If you "adjust" in the cost approach, then you need to adjust in the sales approach - one way or another - no method is automatically excluded however.

Sales comparison approach is (should be) based on market reaction to differences in attributes.

That is not what the textbooks say. again non-conforming loans under regulated banks are required to have an "as is" value - so which is more accurate adjustment? The cost you know or speculating with insufficient "market evidence" to ascertain a bonafide "market based (aka sales?)" adjustment? COST, RENTS, and SALES are all "market data."