Cost Approach For Fire Damage And Permits

[juscoop]

Hello,
I have been asked to complete a cost approach for a property that has been damaged in a fire. The owner of the property has contacted me for the assignment.

Basically, the home has approximately $100K in fire damage per the contractor hired to complete the work. The insurance company has paid the owner and they are ready to start the work. However, the property is located in a flood zone and the permit department is saying that the value of the improvements is only $140K per the county assessor. Because the property is located in this specific flood zone the permit department will not issue a permit because the cost to repair is over 60% of the assessed value. I have been hired to rebuff the assessors value of the improvements.

I am familiar with the cost approach although it is not my strongest skill set. Nor am I totally familiar with the assignment type. I have completed a cost approach on the property using the Marshall and Swift online Swift Estimator and the 1007 form. The home is a newer residence built in 2001. The home is1428sf with 3 beds and 2 baths. Average quality with concrete tile roof and wood lap siding. Interior is your typical tile counters, carpet, vinyl flooring and cultured marble enclosures. The home is located in a tract development. My replacement cost estimate is $180K with $10K worth of depreciation already taken out based on the Marshall and Swift tables.
I am working on completing my scope of work for the assignment and ran in to a few questions and doubts.

1. Does this report solve the client’s problem? Obviously I have completed what he has asked. Will the building department accept the report? Are there any nuances that I am not aware of? I have contacted the building department but have yet to hear back from them and he really did not want me to speak to them of his specific situation since he is already having issues with them.

2. Do I need to include depreciation? I know in a regular appraisal report I would need to include depreciation but is it necessary in this case? When the subject property is rebuilt it will be nearly new and completely redone. When completing the cost approach for market value depreciation needs to be taken into account. I guess I am somewhat uncertain if this is really "market value." I completed a market analysis of the property for my own knowledge but it is not a component of the assignment that the client has asked for. The market analysis of competitive properties show a lower value but in this market area you can buy them cheaper than you can build them.

3. While the home has significant damage not all components need to be replaced. The slab is fine as well as other portions of the home. Do these items need to be excluded from the cost approach since they will not need to be rebuilt? Also the permits to rebuild vs. new construction are not the same. Do these need to be taken into account?

4. I do not plan to include a land value in my analysis because it does not appear to be a component of the assignment and there are NO land sales in the area that are comparable. Extraction and Allocation the appraiser's token response are not really valid in the situation since there are no competing or similar areas from which to find land sales. I believe if I state that no land value analysis was completed and state that in my scope of work and my client is agrees to its absence then my bases are covered.

Is there anything else I might be missing? I want to make sure my logic and scope of work are acceptable for this assignment and that it is useful to my client. Thank you in advance!!

 

[Terrel L. Shields]

Insurance adjusters use a different book and frequently use "Reconstruction" costs, not replacement costs.

If you do the CA using that book, it's fine just be aware the other "RCN" exists.

It will be important to accurately determine the land value and you should be able to support that by reverse engineering comps so you can support the idea that the value of the building contributes whatever it is.

If you have not determined the market depreciation, then how are you going to justify the contributory value? And what is "Marshal & Swift depreciation" telling you except physical depreciation? Is there a further deduction necessary for external influences?

They are saying that the damage was $100,000. You are saying the RCN is $180,000 for the improvements. The permit police say RCN is $140,000.. or the damage was? That's 56% v 78%. I really don't know how you can tell what the contributon of the building was if you cannot value the site. And if the site is in a flood zone, i suggest that the value is pretty low. So...what do the sales tell you in that area? And what ratio and/or value does that assessor have on the lots and other lots nearby? This is no $250 assignment.

I suggest you find someone to help you.

 

[CATaxAssessor]

First of all the value of the structure is 140K per the county assessor. Is that value a recent assessment? Many times a county’s assessment or their current roll value may or may not be a true market value. If the property was purchased 10 years ago, then a market value should have been placed on the tax rolls at that time. But from that point on, the annual increases (In California) are based on the consumer price index (CPI) not to exceed 2% annually per Proposition 13. This inflationary factor has not kept pace with what is actually happening in the market place. Here in southern California, real estate has decreased 10 – 12% (Conservative estimate) whereas the CPI index rose just over 1% for tax year 2011/2012.

When valuing new construction of a residential property the assessor does not use Marshall & Swift. The will use the Assessor’s Handbook publications through the State Board of Equalization. (See http://www.boe.ca.gov/proptaxes/pdf/ah531.pdf ) Assessor’s Handbook 501 and 531 as well as Rule 463 (http://www.boe.ca.gov/proptaxes/pdf/r463.pdf) all address new construction. Depreciation will not be deducted for a new or almost new structure. The bigger issue is whether the value under CA is comparable to the market approach. From what I have seen in my area, the cost is higher than market on most properties. The need for some time type of economic adjustment may be needed.

As I said in my initial comments, was the 140K structure value the result of a recent assessment. With declining values it is possible that the county assessor either through an appeal application by the owner or through a proactive review may have temporally reduced the assessed value under Proposition 8.
As for your item #3, you should review how the assessor handles these type of situations. These situations are referred to as an calamity. Below is from the Sacramento County Assessor’s website and explains how calamities are valued.
[FONT=&quot]Calculation of the Assessment Reduction:[/FONT]

• [FONT=&quot]Determine the percentage of damage to Market Value:
  $50,000 divided by $200,000 = 25% Market Value damage [/FONT]
• [FONT=&quot]Apply that percent of damage to the Assessed Value on the tax roll:
  The property's factored base year value (Prop 13) on the tax roll is $100,000. Therefore, 25% of its factored base year value is $25,000. [/FONT]
• [FONT=&quot]Apply the loss to the factored base year value to reflect only the period between damage and completion of repairs:
  The repairs are complete in six months, so we adjust the $25,000 loss to reflect its duration of 50% of the year. 50% of $25,000 = a $12,500 net reduction in factored base year value.[/FONT]

[FONT=&quot]Because property taxes are 1% of assessed value, a reduction of $12,500 in factored base year value amounts to a net savings of about $125 in property taxes owed.[/FONT]
[FONT=&quot]Note that the amount of damage suffered was $50,000 but the calamity tax relief totals only $125. As you can see, this form of relief can be very limited.[/FONT]

 

[Howard Klahr]

The issue at hand is not the cost to repair nor the cost to construct, it is what was the market value of the property immediately prior to the fire. This is how non-conforming improvements are typically handled when being evaluated for re-build subsequent to a peril. Specifically what was damaged and to what degree is not part of the analysis. Don't over complicate the issue.

Since this is a market value assignment, there is no limitation on what approaches should be use. It is appropriate to use all approaches to value that are relevant.

 

[hastalavista]

The issue at hand is not the cost to repair nor the cost to construct, it is what was the market value of the property immediately prior to the fire. This is how non-conforming improvements are typically handled when being evaluated for re-build subsequent to a peril. Specifically what was damaged and to what degree is not part of the analysis. Don't over complicate the issue.

Since this is a market value assignment, there is no limitation on what approaches should be use. It is appropriate to use all approaches to value that are relevant.

Howard-

The way I read it, the market value opinion is a component of the assignment, but the specific value question to be addressed is the contributory value of the improvements. Repair costs in excess of 60% of the improvement's value (as calculated by the tax assessor's appraisal) disqualifies the home from being rebuilt.

So the contributory value of the improvements (market value, on the day before the calamity) is the value problem to be solved. If their contributory value results in a repair cost of less than 60%, the homeowner can rebuild. If it does not not, he/she is out of luck (at least, that's what I glean from the OP .. but maybe I am misreading the issue?).

I suppose one could do this without the cost approach but I don't see how one could do this without properly analyzing site values.

 

[juscoop]

Thank you all for your thoughts! Denis, that is how I viewed the assignment. The problem was the contributory value of the improvements. However, I thought that through scope of work I could limit the analysis to just the cost approach (which is what the client asked for). However, I re-read USPAP and the scope of work assignment and feel I may have been incorrect thinking that I could simply provide a cost analysis of the structure using Marshall and Swift. I guess really I am still unsure if this is allowable with the scope of work rule. In realty this assignment is probably over my head, not to mention the property was on the news because of the issue with the building permits. I am going to pass the assignment on to an SRA and see if I can help complete the assignment with guidance.
The subject sold 2 years ago which is where the $190K assessed value came from as that was the most recent sales price. Comparables are currently going for $170K - $180K at best. Using the extraction method led me nowhere since the cost estimates to replace are so high that there was nothing left to attribute to the land. Again, there were no land sales in the market area within 4+ years. The assessor shows 20-25% is allocated to the land value for comparable properties but I think this is too high based on an analysis of land sales within the past year with a 10 mile radius. Not to mention the property is located in a flood zone. However, when I spoke to the assessors office they could not tell me how they came up with the number....

 

[CigarDad]

It is the FEMA flood hazard insurance program requirements that dictates this 50% rule.

There are ways to 'work' the system. For example if the property is located in a flood plain with a 1' - 2' flood level the new improvements can have a foundation that brings the improvements above the flood level.

The second more painful suggestion is to build out to the 50% rule. Then the next year build out to the new 50% rule, etc. until you get back to the original improvement size.

Regarding your cost approach you can subtract the amount required to remove the damaged portions and then focus on what the cost to rebuild from that point on is.

Since you are not getting any help from the local authorities I would contact FEMA regarding their requirements for the 50% rebuild rule. Also I have found that meeting face to face with the local officials goes a lot further in getting the required information that I need versus a telephone call.