Condition of Sale: Seller to Pay Special Assessments

[Carter Wynn]

Special assessments are common in my local market for both new and existing properties. Market participants are aware of these special assessments. When comparing sold properties, the market often indicates balances should be adjusted when the differences are significant. Practice in this market is to adjust the difference on the bottom line item in the grid. EX: Bottom line item; list subject assessments of $2,000; list comp assessments of $10,000, then adjust the comp +$8,000.

Working on an appraisal of an existing property purchase where the seller is to pay off ~ $5,000 in specials on date of closing. This payment of special assessments has an obvious impact on market value; as-is MV is ~$5,000 less than if the specials had been paid today.

Already contacted my client on how they would like me to proceed. However, I'm curious how other appraisers would handle this seller paid: Would you simply state conditions of the contract, and appraise "as-is"; or appraise on the basis of a HC (CB3) that the specials are paid? "Other" is an option as well, I suppose.

Any insight is appreciated.

 

[Terrel L. Shields]

I suppose you need to define what those special assessments are. Are they private fees charged by the HOA? Are they something charged by a (governmental) improvement district?

Is the seller in arrears with their assessments? If so, then it appears the seller has the obligation to pay them to "cure" the problem. So if they are paying them, then it is a sum zero game.

If the buyer somehow owes such "assessments" as a condition of purchase and the seller is paying for it, then it is a concession and needs adjusted. In my opinion, generally adjusted dollar for dollar unless the is just something everyone has to pay.

 

[Carter Wynn]

A special assessment is a charge for the cost of infrastructure and public improvements such as sewers, streets, curbs, gutters, sidewalks, waterlines etc. The costs are assessed to properties that will benefit from an improvement project.

There is a yearly installment, which we identify as "specials", along with a "balance remaining". The adjustment is for the difference in "balance remaining". Balance remaining is commonly paid over a period of 5 - 25 years. New properties generally range from $20,000 - 50,000 remaining. Existing, 20 + yr old properties will typically range from $0 - $10,000. The adjustment in the grid equalizes the market effect of specials.

Occasionally a property owner pays off specials up front, rather than pay over that period of say.. 20 years. Either way, the new owner assumes any remaining specials when a property transfers.

Hope that clarifies a bit.

 

[hastalavista]

I think I'd do exactly what you did: Contact my client and ask them how they want me to handle it.

Since you are required to value the property as of a current date (prior to the seller actually paying of the assessment), as-of that date, the special assessment is still in place.

The easiest way to complete this assignment would be value the property with the HC that the assessment has been paid off.
The lender can then ensure it gets paid prior to closing, and the lender can verify it did get paid without having to order a 1004D.

I can think of arguments for using an EA, but the HC is the cleanest, IMO.

 

[Terrel L. Shields]

Now I see why they have low taxes otherwise....
I think this is the same as Mella-Roos taxes right?

 

[J Grant]

Special assessments are common in my local market for both new and existing properties. Market participants are aware of these special assessments. When comparing sold properties, the market often indicates balances should be adjusted when the differences are significant. Practice in this market is to adjust the difference on the bottom line item in the grid. EX: Bottom line item; list subject assessments of $2,000; list comp assessments of $10,000, then adjust the comp +$8,000.

Working on an appraisal of an existing property purchase where the seller is to pay off ~ $5,000 in specials on date of closing. This payment of special assessments has an obvious impact on market value; as-is MV is ~$5,000 less than if the specials had been paid today.

Already contacted my client on how they would like me to proceed. However, I'm curious how other appraisers would handle this seller paid: Would you simply state conditions of the contract, and appraise "as-is"; or appraise on the basis of a HC (CB3) that the specials are paid? "Other" is an option as well, I suppose.

Any insight is appreciated.

The actual sale ( sale contract price and terms ) of a subject is always apart from the hypothetical sale of subject on effective date for analysis of market value.

In other words, the "real " sale of subject will close, for example, on March 20th and has a contract with 5k in seller paid assessments. Your hypothetical sale of subject on for example March 7 (inspection date), does not have seller paid assessment, it is "as is". Thus, the market value opinion will be comparing whatever market impact seller or prepaid assessments of comps have, to your subject which has 5k of assessments outstanding on effective date.

It's similar to when the seller grants concessions on subject, we adjust comps with concessions to the hypothetical sale of subject with no concessions (market value opinion definition for subject terms)

Note it as a contract terms of sale to occur at closing. If it turns out there is a variance between your market value opinion and contract price, that might explain it.

 

[J Grant]

Imo, this is akin to a seller paid concession, and should be treated as such...when we appraise a subject property where seller is paying a concession, we always adjust the comps with concession to a subject as if subject has no concessions (value unaffected by concessions or special financing)

This seller is paying off 5k assessment at closing, because he is using proceeds from buyer to do so...otherwise, seller would pay off 5k now, and list/market the property as for sale with assessment paid.

 

[mark hurlock]

Special assessments are common in my local market for both new and existing properties. Market participants are aware of these special assessments. When comparing sold properties, the market often indicates balances should be adjusted when the differences are significant. Practice in this market is to adjust the difference on the bottom line item in the grid. EX: Bottom line item; list subject assessments of $2,000; list comp assessments of $10,000, then adjust the comp +$8,000.

Working on an appraisal of an existing property purchase where the seller is to pay off ~ $5,000 in specials on date of closing. This payment of special assessments has an obvious impact on market value; as-is MV is ~$5,000 less than if the specials had been paid today.

Already contacted my client on how they would like me to proceed. However, I'm curious how other appraisers would handle this seller paid: Would you simply state conditions of the contract, and appraise "as-is"; or appraise on the basis of a HC (CB3) that the specials are paid? "Other" is an option as well, I suppose.

Any insight is appreciated.

Your status indicates you are a trainee. You also indicated that assessments are common in your market. I would be interested in knowing what your supervisor has told you about something so common in your market.

 

[J Grant]

I would not look to the client to resolve an issue like this... it's a seller paid incentive and should be treated as such. The market value opinion is based on appraising the subject "as is", with a price not affected by creative financing or concessions.

How seller paid, vs outstanding assessments affect value needs to be seen in the market reaction/price of different properties, can't assume the price is affected $ for $ (thought it might be)

 

[Carter Wynn]

Your status indicates you are a trainee. You also indicated that assessments are common in your market. I would be interested in knowing what your supervisor has told you about something so common in your market.

Mark, my status above is outdated, I've been licensed going on seven years and sit for the CR test in a month. FWIW, I emailed peers on the topic prior to hopping on the forums and received a couple different answers.

I appraised the property on the basis of a HC that the specials have been paid in full as of the effective date as conditioned in the contract. Thanks everyone for your help.