Below Average Condition

[TonyBarett]

Hi, new to the forum and kind of perplexed by one of my first appraisals that I will be doing for a workshop that am taking, as I have just finished my 90 hours of instruction in the state of California, and awaiting my test date. Subject is at or near the predominant low for the neighborhood as far as quality and condition. The inside has broken door jams, stained carpet, holes in walls among the questionable items. The outside has overgrown landscaping and the house itself has chipped and rotting wood trim. The subject is in a neighborhood that is a desirable tract development with most houses conforming to one another. Lowest comp in the area appears to be in superior condition. Would you estimate the value inline with this comp and state that subject is benefiting from the principle of Progression, or is their something i am missing.
Thanks for your opinion.
Tony Barrett

 

[Restrain]

O.K., I'll give you a general answer. "Average" is typical for age, market. "Good" indicates superior maintenance (fresh paint, recent carpet, good exterior maintenance). "Excellent" indicates updating, remodeling, etc. To the other end, you get into "Fair" and "Poor". Rather than drop into those catagories (unless it's a real old dog near the end of its life), I go for "Needs sig. repairs" in the Condition section and explain.

You will not experience an increase along with the neighborhood (O.K., that's a generalization) because of the needed repairs and the fact that the probable buyer is NOT a typical owner-occupant. First, you couldn't get the home past most UWs with the condition problems, and, second, the problem with getting home improvement loans or getting a FHA redo loan. Your probable buyer is an investor who will buy the home at a significant discount, do the repairs, and look for a 20% profit margin plugging in marketing costs and seller's contributions to financing.

Hope this helps.

Roger Strahan, SRA, IFA

 

[Bob Ipock]

Thanks Roger. I will print this piece and use it in some appraisal classes.

As a general rule, we do appraisals (for lending anyway) to offer an opinion of what a home is worth to a typical buyer. The bottom line is..."what would this home be worth if it suddenly came back to the lender" and had to be sold?

Appraisers who have spent some time in the trenches (as brokers and agents) will
have a better understanding of what a typical buyer expects in terms of condition, appeal etc.. We have seen the reactions of buyers to how a house "shows".

Most homes that are placed on the market for sale will tend to be in a marketable condition, with some fix-up, clean-up and spruce-up items done inpreparation to sell. Their agents will encorage them to get the home ready to sell, to make it more appealing to potential buyers.

As a general rule, homes that are SOLD on the open market, thru an agent will tend to be in superior condition to an existing home being refinanced.

As appraisers we are looking at homes thru the eyes of potential buyers. What would the typical buyer be looking at and looking for. What is expected by a potential buyer? What will it take to be able to sell the home in a reasonable amount of time?

 

[TonyBarett]

Thanks for the replies, let me explain my problem a little more clearly.

This appraisal is being done for educational purposes only. I understand that if this was for a loan that the subject’s condition can and would most likely kill the loan. The value that is being sought is market value. The neighborhood the subject is in is experiencing very short exposure time, in most cases less than a month. There are very few houses for sale, maybe 2 – 3%, most potential buyers are owner occupied as there are very few income properties in the area. To bring the value in 20% below the lowest comp based on someone fixing and flipping would be investment value, would it not?

Thanks! Tony Barrett

 

[KD247]

I would follow the same model as for any type of unusual characteristic.

Here's specifically what I would do:

1) Find dated comparables that sold in similar condition and establish a factor that represents the discount the market demands. You may need to go back several years to find these comparables.

2) Find distant comparables that sold in similar condition and again establish the discount the market would demand. You may need to go several miles away to find these comparables.

3) Correlate your adjustment factor with your Cost Approach figures, incorporating both the estimated cost of repairs and the discount a buyer would demand for a house in less than turnkey condition.

4) As a reality check, interview agents and buyers in the subject's neighborhood and correlate their estimates with your factor.

5) State in the report that the subject is unusual for the area and so has a wider range of possible values than most homes in the area.

As a general rule, it's difficult to support adjustments based on comparables that don't bracket the subject in all important characteristics. Relying on the Cost Approach will tell you how the market should logically respond, but it doesn't tell you how buyers (emotional human beings) would actually respond to the subject's condition. And, I wouldn't make any assumptions. In the current strong California market, particularly if there were no other homes available, you may find that buyers would completely ignore the condition of the Subject and pay even more than the most recent similar sale realized (assuming that prices are continuing to increase).

A relative just put a Santa Barbara condominium (investment) on the market and was wondering whether to replace the stained carpet and dead appliances. Highest sale in the project and (similar units) in the area was at about $X. Asked $X+$10,000 and immediately received 8 offers, mostly overbids, a couple at about 8% over asking price. Should we turn the buyers into the Office of Real Estate Appraisers because they are ignoring appraisal guidelines?

 

[Mike Garrett RAA]

Think I said this in another thread...."Marketability, marketability, marketability". The purpose of the appraisal it advise the intended user of the appraisal (like that term?) the value of the property as colateral for a loan...in most cases.

Forget you are an appraiser. Now you are a lender with say $150,000 to invest and you want to do it in the form of a mortgage loan. You want to know that if you have to take the property back can you sell it. Remember you will have both time and costs involved in the event of foreclosure. How would you rate the property?

For lending purposes Fannie Mae has said the following are recommended ratings for condition:

Good, Average, Fair, and Poor.

Good, average, and fair are all acceptable and Fannie Mae will purchase the loan. Most appraisers are reluctant to use fair because many loan officers and underwriters are mistaken about the guidelines.

I prefer to add a couple more classifications so that I can be more descriptive. Mine are as follows:

Excellent - Indicates the best. Either new or totally renovated.

Good - Well maintained, usually updated

Above Average - looks better than most other similiar homes in the neighborhood

Average - Reflects what is typical for the neighborhood

Below Average - looks worse than most other similiar homes in the neighborhood, shows signs of deferred maintenance.

Fair - Habitable but substantially worn, needs updating and a general clean up.

Poor - Need lots of work. Major renovating. Might not be habitable. Would not appeal to a typical buyer.

As far as dollar adjustments it will depend on the price range of the homes homes and typical costs for your market. Over the years I have developed adjustments that are rounded to the nearest $1000. In a lower median priced neighborhood that adjustment might be $3,000 increments. Sometimes certain repairs, remodeling, or updating might be reflected on two lines (the age line and the condition line). There is no real guideline for this, it is subjective and the reason it takes experience to be an appraiser.

What really helped me was 12 years in real estate sales before becoming an appraiser. I was able to recognize "buyer reaction" to things like condition. It is not uncommon for buyers to think in terms of $1,000 for minor stuff, $3,000 for substantial repairs and updating, and $5,000 to $10,000 for major items.