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Condition Rating And Economic Life For A House With Foundation Damage

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pdaniel7

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Feb 8, 2008
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Certified Residential Appraiser
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Colorado
Hi everyone. Upon an appraisal inspection for a sale of a 2-story home constructed in 1981, I discovered a network of substantial cracks in the basement foundation wall with part of it bowing inward about 2 inches over an approximately 8'x10' area at the corner of the home. After speaking with the listing agent, she provided me with both a recent structural engineers report from the last 30 days and an estimate of value for repairs of about $25k. The buyer is well aware of the issue, and after informing the lender, they still want me to proceed with an "as-is" appraisal. ( I was hoping they would just cancel the deal, but no such luck.)
Here are my main dilemmas of which I have not encountered before: If there were no foundation issues, the interior and exterior of the home give the subject a solid C4 rating. However, I am wondering if a C6 should be the appropriate rating (C6 - The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness, or structural integrity of the improvements). Not sure if I should put C4 and clearly explain the foundation issues, or put C6 and clearly explain that if not for the foundation issue, it would hold up as a C4?

Second dilemma is: The engineers report does recommend repairs, but does not specifically address how quickly damage would continue to worsen, if at all, to the point the home would become unsafe or uninhabitable. Per the listing agent, the damage has remained unchanged for the nearly 10 years the current owner has been there. Since I have no way of knowing if the foundation is continuing to deteriorate, or at what rate, how can I determine an estimated remaining economic life? Do I do it normally, and explain that it is based on the assumption that the foundation will not continue to deteriorate?

Any help will be greatly appreciated!
 

Lee in L.A.

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Certified Residential Appraiser
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California
Per the listing agent, the damage has remained unchanged for the nearly 10 years the current owner has been there.
I feel pretty skeptical about that statement. Can you talk to the engineer about the rate of deterioration etc?
 

pdaniel7

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Freshman Member
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Feb 8, 2008
Professional Status
Certified Residential Appraiser
State
Colorado
I feel pretty skeptical about that statement. Can you talk to the engineer about the rate of deterioration etc?
I have not been able to speak with the engineer due to the holiday. (I did the inspection on Friday, and not getting a response today.)
 

Lee in L.A.

Elite Member
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Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
More comments from them would help. Sound like C6 as is. Probably a value hit of more than $25k. I'm sure you'll get a variety of answers.
 

Riick

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Aug 14, 2007
Professional Status
Certified Residential Appraiser
State
Delaware
123456789098654312313
(cash)
 

J Grant

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Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
Ask your client. If it is a fannie/FHA /freddie assignment, most want if the subject is a C 5 or C 6 that it be made subject to repair to C 4 condition. I assume if it is made subject to repair to C 4 that it would be valued as a C 4. Some lenders also want an additional"as is " value.

As far as remaining economic life, that is based on what you observe as of effective inspection date ( not what will happen later), and it would depend on if it is made subject to repair to C 4 or "as is:"
 

pdaniel7

Thread Starter
Freshman Member
Joined
Feb 8, 2008
Professional Status
Certified Residential Appraiser
State
Colorado
123456789098654312313
(cash)
Right? I am baffled that the lender wants this "as is" since a loan for a home with foundation damage will never sell on the secondary market. I just spoke with the head appraiser for the AMC (which is a good one I have had a great relationship with) and he agreed that this must be done "subject to repairs" and that whoever decided that it should be "as-is" didn't understand what they were talking about. He is going to speak with them tomorrow and told me to hold off for now. If I am lucky, this assignment will just be cancelled. However, I am still hoping to get some opinions on the proper condition rating and estimated remaining economic life in the case of "as-is".
After further consideration, I am thinking this would be a C5, since it is not currently uninhabitable.
 

pdaniel7

Thread Starter
Freshman Member
Joined
Feb 8, 2008
Professional Status
Certified Residential Appraiser
State
Colorado
Ask your client. If it is a fannie/FHA /freddie assignment, most want if the subject is a C 5 or C 6 that it be made subject to repair to C 4 condition. I assume if it is made subject to repair to C 4 that it would be valued as a C 4. Some lenders also want an additional"as is " value.

As far as remaining economic life, that is based on what you observe as of effective inspection date ( not what will happen later), and it would depend on if it is made subject to repair to C 4 or "as is:"
Thank you. I appreciate it!
 
D

Deleted member 130081

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Right? I am baffled that the lender wants this "as is" since a loan for a home with foundation damage will never sell on the secondary market. I just spoke with the head appraiser for the AMC (which is a good one I have had a great relationship with) and he agreed that this must be done "subject to repairs" and that whoever decided that it should be "as-is" didn't understand what they were talking about. He is going to speak with them tomorrow and told me to hold off for now. If I am lucky, this assignment will just be cancelled. However, I am still hoping to get some opinions on the proper condition rating and estimated remaining economic life in the case of "as-is".
After further consideration, I am thinking this would be a C5, since it is not currently uninhabitable.
IMO, this is not as tough as you may think. Also IMO, this is a case where you have to make a few assumptions about what is likely to happen (that part is a bit tougher).

For starters, the house is C6 as you describe it. It would need to be habitable and not have a defect that affected the structural integrity to be C5 or better.

The appraisal will likely be done employing a hypothetical condition that the basement is free of defects. In that case, your value opinion need not consider the extent of the damage or needed repairs (that’s the easy part). The use of the hypothetical condition employs the use of a hypothetical condition rating too.

It gets a bit harder if your client wants an as-is value as well (or only an as-is value). The first thing to consider here, is that the home is likely not marketable at all, which means you can’t value it at all. This conclusion is the part where you have to employ a few assumptions about what is likely vs what is possible. It is likely your largest and most typical buyer pool will not purchase the property at all, as-is. Therefore, the seller will need to cure the problem at their own expense to render the property marketable and then, you are right back where you started for valuation, having a basement free of defects.

The trickier part is that there are in fact a pool of buyers that would purchase the property as-is. I know I just said it was unmarketable, but that is not entirely true. Real estate investors may be very happy to purchase the property as-is. However, they are not your “typical” buyer, are fewer in numbers and behave differently. That said, investors do exist in every major market, enough to conclude there would be one for your subject – the only scenario where you would question their existence would be a very small or rural market. Investors would offer to purchase the property considering the as-repaired value first (ARV), then subtracting the profit they intend to make, minus all holding and other expenses involved in both sales and in-between, and finally subtracting the cost of repairs, which will be a worst-case scenario calculation. Because these types of buyers in fact calculate how they will offer, you too can calculate it and arrive at market value. You do this by starting with homes free of defects and working backwards, so you don’t have to find comps with basement issues. You could of course find comps with basement issues too, however IMO, I would still do the reverse calculation even if you have comps with defects, as it is likely you will have few comps like that and ALL investors use the reverse calculation so, the reverse calculation may end up being a better indicator – both should be developed if possible.

I bet you wonder what the profit margin is right? The typical formula for profit is 30% of ARV, however a $20k minimum is also typical (that means investors typically shoot for 30%, but will walk away if the 30% is less than $20k).

Expenses are trickier and could depend on the individual investor. The only wild card is if the investor intends to purchase with cash or credit, and in the event of credit, the cost of credit is counted as an expense. Other expenses include purchase/closing costs at purchase, insurance, property taxes, utilities and sale/closing costs at sale.

Cost-to-cure a basement is likely something you are familiar with. Around here it is about $250 a linear foot in the worst-case scenario.

I hope this is helpful and good luck!
 

residentialguy

Elite Member
Joined
Mar 24, 2009
Professional Status
Certified Residential Appraiser
State
Minnesota
If this is for FNMA guidelines, you can't have it C6, as is...as mostly the with C5, as well. It would be automatically be marked C4 or better (whatever the overall condition will be after it's repaired) and you must the box subject to repair of the foundation, and the report would be done on the basis of a hypothetical condition those repairs or alterations have been completed. (you would note and describe the C6/C5 condition in your additional comments, hence why you made it subject to repair). In regards to cost to cure, I personally would say that due to the unknowns that can't be detected with visual appraisal inspection (for the purposes of determining market value), a professional specialist in foundation repair is required to provide that information.
 
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