Confused about CTC adjustment

[nybuyer]

I need help to understand how this adjustment is impacting the value of a property I am considering. The subject property needs work and the appraiser adjusted for this work by subtracting this value from the comps as a CTC adjustment. Does this mean if the work is performed the value should go up?

I am being told the following by someone (not the appraiser).

"That is not how is works… the appraised value was “subject to” those items being completed. If the work is not done, the value would be reduced by this amount, making the home worth less if left incomplete. The value will not increase by $8500.00, it is already considered in the current $211000.00 value. "

 

[Dublin ohio]

Since the appraiser made a negative across the board adjustment for the cost to cure. It was deducted and would have some impact on the value opinion. Whether or not it is dollar for dollar. That would depend on the appraiser's final reconciliation of value. Typically when I make a cost to cure. I add an additional 'Hassel fee" for lack of a better term. Since the typical buyer would expect a discount above and beyond the actual cost to cure. Could be 10-20%

 

[glenn walker]

OK Two issue here - 1- Did the appraiser do the report ( As Is ) or Subject to the repairs being completed ?
If he made it subject to repairs being completed before lender can fund the loan and close escrow there is no cost to cure adjustments done on the comparables because your end product has no cost to cure and has been brought up to similar condition as the comparables and your value would not go down.

BUT if he did it ( As Is ) with ( No ) required repairs then he may adjust the cost to cure against the comparables lowering the value by that amount In other words the appraiser cannot do double adjustments and so if he makes it subject to repairs being completed he makes no adjustment against the comparables and your value does not go down.

Actually this is not exactly the way it works because he is supposed to make the $ amount of the adjustment based on market reaction being how buyers in a market treat these repair but I don't want to get into that because it will most likley confuse you and I want to stick to basics of course 101 : ) .

 

[George Hatch]

It appears the assignment includes a requirement for the appraiser to develop an opinion of value for the property in it's current condition, aka "as is". There are basically two ways to do this for a property that needs repairs of completion of proposed construction or a proposed remodel.

1 - the appraiser can attempt to find and use other properties which are in the same condition and require the same amount of work for completion. So for example if the subject was in beater condition and is being proposed for a major remodel, the comparables most closely indicating to its "as is" value would be other properties in similar condition. The challenge with such properties - which includes your current situation - is that there are seldom enough such sales to develop this type of analysis. In your case it would usually be almost impossible to find several sales, each needing ~$10k in repairs or upgrades. So due to the lack of relevant data this tends to be the approach less commonly developed.

2- the other, far more commonly used approach is the one used in this analysis. The appraiser identifies sales involving properties that are in that finished condition and then backs out the discount that's applicable for this current condition. Meaning, if the property was finished it would be worth the "As Is" + $8500 more.

Where I would take issue with the example given above is that the actual discount for a property needing another $8500 in hard costs (labor+materials) to complete would normally be far in excess of the $8500. All real estate is local so what applies in my area might not be the same as what applies in your area, but in our region that discount would be closer to $15,000, not $8500. It would include the hard costs but also include some incentive or profit margin, sufficient to prompt a buyer to undertake this "needs-work" property instead of a similar property that's already finished. Most investors don't work for free, or undertake the uncertainty of an incomplete remodel project for the break-even.

Another angle in the example given is how much rent loss will be incurred whilst waiting for completion of the project and however long it takes to get a tenant in. Thats not an issue with properties needing only minor repair but it can add up when the construction or remodel is anticipated to take months to complete.

 

[nybuyer]

OK Two issue here - 1- Did the appraiser do the report ( As Is ) or Subject to the repairs being completed ?
If he made it subject to repairs being completed before lender can fund the loan and close escrow there is no cost to cure adjustments done on the comparables because your end product has no cost to cure and has been brought up to similar condition as the comparables and your value would not go down.

BUT if he did it ( As Is ) with ( No ) required repairs then he may adjust the cost to cure against the comparables lowering the value by that amount In other words the appraiser cannot do double adjustments and so if he makes it subject to repairs being completed he makes no adjustment against the comparables and your value does not go down.

Actually this is not exactly the way it works because he is supposed to make the $ amount of the adjustment based on market reaction being how buyers in a market treat these repair but I don't want to get into that because it will most likley confuse you and I want to stick to basics of course 101 : ) .

He states (where I highlighted) that it is subject to. But he also adjusted each comparable by the CTC amount. That's why I'm confused. He adjusts all the comps by the CTC, then comes up with the value. Doesn't this mean that if I theoretically don't do the repairs my value will remain the same? Conversely if I do the repairs, the value should go up because then the negative adjustment to all the comps will be removed?

Can it be a subject to and at the same time have a negative adjustment for the CTC on the grid for all comps? Isn't that just an as is that he is calling subject to?

 

[George Hatch]

This is one reason why I *always* express my value conclusions both ways in such situations:

$500,000 - Value of the property in it's "as is" condition
$515,000 - Value of the property "subject to" completion of the proposed remodel, per plans and specifications.

This way the reader can see the effects of the hypothetical (what would the property be worth if the remodel was complete) on the value conclusion.

 

[George Hatch]

He states (where I highlighted) that it is subject to. But he also adjusted each comparable by the CTC amount. That's why I'm confused. He adjusts all the comps by the CTC, then comes up with the value. Doesn't this mean that if I theoretically don't do the repairs my value will remain the same? Conversely if I do the repairs, the value should go up because then the negative adjustment to all the comps will be removed?

Can it be a subject to and at the same time have a negative adjustment for the CTC on the grid for all comps? Isn't that just an as is that he is calling subject to?

If the property was appraised in finished condition ("subject to" those repairs being completed) then that condition would not trigger the use of those adjustments.

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[nybuyer]

If the property was appraised in finished condition ("subject to" those repairs being completed) then that condition would not trigger the use of those adjustments.

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Do you mean even though they are on the grid they should not be used in the netting? Because they were actually used. I did the netting and averages by hand and the CTC was subtracted. Sorry if I'm being thick.

 

[George Hatch]

Which of the boxes are checked in the appraisal report?

 

[nybuyer]

Which of the boxes are checked in the appraisal report?


View attachment 53748

"Subject to the following repairs..." See Addendum. Then the addendum lists the repairs- a total of $8500 as Cost to Cure. Then this CTC is applied as a negative adjustment to all the comps.

The way this appears to me, is that the value of $211000 (which is derived as a result of all comps getting the -$8500 adjustment applied before getting the average) is actually an As-is value. If it was a subject to, then the $8500 should not get subtracted from the comps, and the value should have been $219500.

How could $211000 be a subject to if the CTC is already adjusted for?