Drainage Adjustment?

[MKay Appraising]

Scenario: Foreclosure assignment on a home with standing water in the crawl space. As-is value.

Typically, I make reports subject to remediation of the standing water and improper grading. That's because I mostly deal with USDA, FHA, FannieMae, etc. I'd consider it a structural integrity issue. BUT, what if you had the above scenario? On the new UAD 3.6, you have to put in features of the site. Obviously, you'd put in "drainage;standing water" and say it has an adverse effect. But now that you've said the drainage issue has an adverse effect, you may be expected to make an adjustment on the grid. I've never made a drainage adjustment before and I'm not even sure how to derive that in the normal course of work. I can't inspect every comparable as thoroughly as I'd like in any given assignment.

I had an idea though and I'd like to run it by everyone. What if, in this scenario, I just made the following comment: "The drainage issue has been considered in the overall quality/condition ratings."

Thoughts??

 

[TerryRohrer]

Adjust down by cost to cure, create a dump pit and install sump pump. I would estimate cost of doing the work and double it to account for risk and profit.

 

[MKay Appraising]

Makes sense, for sure! But now I'm running into the problem of bracketing. Would finding a comparable with ANY externality be a good enough bracket on the grid?

 

[Mike Ault]

Makes sense, for sure! But now I'm running into the problem of bracketing. Would finding a comparable with ANY externality be a good enough bracket on the grid?

Bracketing to support an adjustment is a recommendation, not a requirement. If it isn't possible, just explain. Expanding search parameters "as far and wide as necessary" to bracket something like that is poor appraisal practice unless you have rock solid support for your location and time adjustments, which you seldom will. I would follow Terry's advice and not waste much time trying to compare widely disparate externalities just to have something which didn't need any adjustment since 99.9% of the buyers for that property are going to have the defect corrected and would typically discount their offer by the cost of hiring it done.

 

[sputnam]

Scenario: Foreclosure assignment on a home with standing water in the crawl space. As-is value.

Typically, I make reports subject to remediation of the standing water and improper grading. That's because I mostly deal with USDA, FHA, FannieMae, etc. I'd consider it a structural integrity issue. BUT, what if you had the above scenario? On the new UAD 3.6, you have to put in features of the site. Obviously, you'd put in "drainage;standing water" and say it has an adverse effect. But now that you've said the drainage issue has an adverse effect, you may be expected to make an adjustment on the grid. I've never made a drainage adjustment before and I'm not even sure how to derive that in the normal course of work. I can't inspect every comparable as thoroughly as I'd like in any given assignment.

I had an idea though and I'd like to run it by everyone. What if, in this scenario, I just made the following comment: "The drainage issue has been considered in the overall quality/condition ratings."

Thoughts??

If you have data that tells you about the market reaction to the standing water fine. You can certainly reconcile to the lower end of the indicated range and explain why you did so.

 

[Tom D]

I bet there are 0% mentions of any standing water in the MLS listings. And typically, every foreclosure have all sorts of issues. You get into trouble not having 'the how' you got any adjustment in your work file. You can say you couldn't find any such sales, never MLS mentioned of course, and blah blah blah, etc.

Makes sense, for sure! But now I'm running into the problem of bracketing. Would finding a comparable with ANY externality be a good enough bracket on the grid?

No no no. The standing water can be cured. Other externality may not be curable. Every adjustment doesn't have to be bracketed. I think that any buyer thinks that cost to cure is that adjustment on that sale price at minimum.

 

[Terrel L. Shields]

Cost to cure - ask someone who does that sort of thing if possible. I am of the school that I can defend the cost to cure but I cannot defend a further adjustment down without support. And chances are you are not going to find a sale that has the same issue from which you can determine a discount for the problem except the time value of money and the fix probably is only a few days. That's my story and I am sticking to it.

 

[TerryRohrer]

Cost to cure - ask someone who does that sort of thing if possible. I am of the school that I can defend the cost to cure but I cannot defend a further adjustment down without support. And chances are you are not going to find a sale that has the same issue from which you can determine a discount for the problem except the time value of money and the fix probably is only a few days. That's my story and I am sticking to it.

We tried selling our mother's house FSBO after she passed. We fixed anything that was damaged or nonfunctional, but just cleaned the carpets, and priced it at $227,500, or so. I figured it was worth $242,000 max, with new flooring. We showed it quite a bit, but got no offers until we replaced all the flooring for a couple of thousand, plus our labor, and raised the price to $248,000 and listed it with a realtor. It sold right away for full price. It did help that the lender, at the realtor's urging, hired their pet appraiser. The realtor told us she hadn't missed a sale price in 27 years, and on ours she told the realtor it was really worth about $5,000 less than the contract, but she made it work at the full price offer. Our net was probably up $3,000 to $5,000 over letting the market fix it to their own taste. Flippers use a similar formula around here, doubling their cost of repairs. The data is there if you choose to look.

 

[Terrel L. Shields]

The data is there if you choose to look.

Our flippers rarely do that. First, they buy REOs because they have a history with the lender who knows they will be able to dump the property quickly. They look at the carpet if dirty, clean it and restretch it. Light paint on the walls and spackle the holes. New appliances if old. Buying them at a discount store or close out. They do repairs themselves below market costs. If cost to cure is $10,000 they rarely spend over $4-5k, so they buy cheap, fix cheap, and make a 30-50% or more proit. Then, they are liable to rent the property for a year or two or very often do a rent to own sale, they rent for a year and if the occupant buys, they will count the rent into their rather inflated price.

 

[TerryRohrer]

Our flippers rarely do that. First, they buy REOs because they have a history with the lender who knows they will be able to dump the property quickly. They look at the carpet if dirty, clean it and restretch it. Light paint on the walls and spackle the holes. New appliances if old. Buying them at a discount store or close out. They do repairs themselves below market costs. If cost to cure is $10,000 they rarely spend over $4-5k, so they buy cheap, fix cheap, and make a 30-50% or more proit. Then, they are liable to rent the property for a year or two or very often do a rent to own sale, they rent for a year and if the occupant buys, they will count the rent into their rather inflated price.

Looks to me like your saying the same thing, except for the atypical motivation born of the ongoing relationship between the lender and the buyer, and the atypical motivation of the lender. But those numbers are useless as they would be different on every transaction.

The most successful one here uses the formula: estimate value as repaired- twice the expected cost to repair = offer (not to exceed, he steals one now and again). Thousands of houses in the 40 years I have known him. Last time I talked to him at length, he had just gotten out of one that had been a meth house. It was not on the State's online list of such properties, as it was supposed to be, and he could find no way to beat it. So, he cleaned it, remodeled it, and sold if for his total cost. Only a fool (not contemplated by the definition of market value) would buy something in need of repairs, make the repairs, and expect to be exactly even, and expect to do that repeatedly without any costly surprises. Anyone who has remodeled anything more complex than a dog house understands that there are repair estimates, and then there is actual cost after completion. The risk is real.