Condition or Functional Utility

[Doug Pack]

I am currently working on a single family home for estate purposes. The home has been occupied by tenants for the better part of 15 years, was built in 1974, and suffers from extensive deferred maintenance (paint, flooring, outdated appliances, etc).

I analyzed 18 comparable sales, 5 of which had similar maintenance issues compared to the subject and were purchased by investors. I was able to extract a solid adjustment factor of around $26,000 for the maintenance issues.

I just wanted to get a general idea of how other members report maintenance issues on two points.

Do you report large maintenance adjustments as a condition or a functional utility adjustment? Based on my observation that the market for this property is most likely segmented to an investor due to the extensive amount of repairs, I feel that adjustments of this size are more of a functional utility adjustment to bring the property up to current market standards, as opposed to a condition adjustment. Does anyone have an opinion on this that they would like to share?

Also, I am planning on making a small adjustment in the condition line for a patio problem that was not present in any of the comparables. Does anyone see a problem with this, or would you lump this adjustment in with the functional utility adjustment?

Thanks to all!

 

[Liz Mura]

I would consider that condition, Doug. I see functional utility issues as ones concerning floor plans with pass through rooms, etc., poor access, over-improvements/super adequacy. Many or most of these things can not be changed. Your deferred maintenance items CAN be cured...all a part of the condition of the property.

 

[Renee Healion]

I vote with Liz, Doug. It's really Condition, the way you described it.

 

[bart nathan]

I see a cost to cure in your future...and guess who is going to asjk for it.

 

[Tony Blackburn]

I'm in the "Condition" pool.

Note that you stated "Deferred Maintenance". I assume you are talking about the "paint, flooring" and not the outdated appliances. You can have old appliances, original floor coverings, original cabinets and fixtures, etc. and they are all in good and serviceable condition. To me, that property may have old things, but condition is not the issue, assuming the comparables are the same. In some cases, vintage, well maintained appliances, etc. can be an asset and are sought after.

In your case, the tone I take from your post is that the place is not well kept and the floors are physically deteriorated, along with the paint. Assuming that's the case, those items are "Condition" items.

I think just becasue something is old, doesn't necessarily mean it's functionally obsolete and a functional utility adjustment needs to be made.

Also, you may want to consider what your client will understand easiest and most clearly.

At best, functional utility and obsolescense issues, not to mention "Effective Age" are not easy concepts for the lay person to understand, let alone for an appraiser to communicate effectively. (No offense at your communication skills intended... )

Count me in as doing a cannonball into the "Condition" pool.

 

[Doug Pack]

It sounds like condition has the votes.

The property does have some functional issues, but most of the issues are just 15 years of poor maintenance. Comps with similar conditions were purchased by investors, which in turn were rehabed & modernized and placed back on the market for a profit.

My thinking was that, since the investors typically reworked the properties extensively to modernize the property, this might be just as much of a functional adjustment as it is a condition adjustment. But for clarity in the report, it sounds like a better argument to report the adjustment in the condition area.

As for a cost to cure estimate, depends on how much they want to pay

Thanks

Doug

 

[Mike Kennedy]

:icon_idea: Doug - sounds like you're confusing Physical Depreciation with Functional Obsolescence. this might help >>>>>>

ACCRUED DEPRECIATION

In real estate appraisal, the total deduction from cost new due to physical deterioration, functional obsolescence and/or external obsolescence. Accrued depreciation represents the total difference between an improvement's reproduction cost or replacement cost and its contributing value in the cost approach.

Typical methods of estimating accrued depreciation include the economic age-life method, the modified econmic age-life method, & the breakdown method. See also economic age-life method, modified economic age-life method, breakdown method,

*******curable physical deterioration, incurable physical deterioration,

*******curable functional obsolescence, incurable functional obsolescence
*******external obsolescence.:icon_idea:

 

[George W Dodd]

IMO it's a condition adjustment

 

[hastalavista]

My View:

Maintenance and repair items = Condition
Utility issues (such as floor plan, functional use of rooms, etc.) = Functional Utility

Lack of modernizations such as appliances or interior finish (maybe get rid of the avocado green shag carpet)?
I used to consider that an "appeal" issue since it affected the marketability (value) of the home, but didn't require repairs or create a non-functional use issue.
Now, I think I'd make it its either its own line-item or lump it into "condition" with an explanation that these items don't need to be fixed or repaired, just modernized.

Since your assignment is for a private party estate, I would itemize the modernization adjustment (if you can); your non-real estate sophisticated client (I assume) may be better served if they can see the different components adversely affecting their value, but relatively easy to correct.

(I know I'm 2-days late on this).

 

[ttaM kooC]

If I had 5 comparables out of 18 that had the same condition as the subject, I would use those as my comps and would not need to apply any adjustment for the subject's below-average condition. Or am I missing something?