Cost to cure adjustment on the grid?

[GWISC]

One way to gauge the contributory value of a bedroom and bathroom is to survey a few real estate agents and other appraisers.

I do this once a year as I have a few agents that will indulge my research. I ask them to give me a range from older blighted housing to new custom built construction. They will also speculate as to the predominant contributory value (your average everyday home).

In my area, per a survey of 5 agents; Full bathrooms range from $5,000 to around $20,000 each with most being between $10-15,000; Bedrooms seem to have a similar range as the bathrooms.

Remember, the cost to cure includes the cost of demolition as well as the re-construction of the bathroom. The market pays for the end result. They do not care about the cost of demolishing the old bathroom. Also, your new bathroom may be within an older house. Those are a few reasons the cost to cure is not necessarily the true market reaction to said new bathroom. The cost estimate, of through Marshall and Swift also does not include developer's profit, but for a bath that is likely to be minor.

I know of few retired builders who have divulged what is typical for developer's profit to adjust my cost approach.

And yes, I do include my surveys in my workfile and it is mentioned in my report as support for my bedroom and bathroom adjustments.

It would take you less than 30 minutes of phone calling to agents you know to get this information.

 

[alebrewer]

I suppose you could. Personally, I think a condition adjustment is more easily understood by most report readers. I also think you'd need to do some matched pairs to determine the loss due to functional obsolescence but then I think you'd need to determine if its curable or incurable. Unnecessarily deep rabbit hole when a simple condition adjustment would suffice in most cases.

How do you determine the adjustment for bathrooms in a typical appraisal? Do you do a curable/incurable analysis? Isn't the bathroom adjustment, by definition, reflective of functional preferences?

 

[Terrel L. Shields]

that the typically motivated buyer would offer exactly $7000 less in price, or seller accept exactly $7000 less in price ?

Does the typical buyer estimate the difference in price at "exactly" $65 per SF? Does the typical buyer estimate the contributory value of the pool at exactly $10,000? Does the buyer attribute the value of a dual car garage exactly $8,000 over that of a single garage? Of course, not. A buyer may simply nix anything without a garage large enough to accommodate their pickup. An elderly buyer may value a pool at exactly $0 but value a hot tub to soak old bones in at far more.

We use a "very precise number" rather frequently, in fact, in the adjustment process. This is no different. Do you estimate the cost to cure or make some wildly speculative estimate under the notion we must insert an ill-supported allowance for the market reaction of some buyer we never met...and it too, is "a very precise number".

If they were, then a flipper doing a $30,000 remodel would not see it get back $60,000

Lot of difference between patching a hole and doing a major remodel. And, we don't know what tricks those flippers know. I did a townhouse where the carpet was about the worst I ever saw and said it needed replaced, but the buyer was a local repair guy. I came back after the job was done. He restretched the carpet and a deep clean and it was very good indeed. It is no easy task for an appraiser, let alone a borrower, to assess "condition" when we don't actually do the work.

Some buyers simply will not buy a house needing work, no matter if minor.

And some will, as noted above, in this market, you take what you can get and fix it later...a friend of mine knew 3 defects in his house. The living room hardwood floors were in fair condition and a poor match to the rest of the hardwoods. The deck was always a problem and the septic tank was stuck under the deck. But the house was what they wanted. It had the extra detached garage he could do his leatherwork in, and the kitchen suited her, the garage could accommodate 2 cars and a motorcycle. They didn't hum haw around about the deck and floors. They bought the place and replaced both the deck and the flooring. There is nothing they can do about the septic. It was take it or leave it. They took it and spent the money.

I generally use about 150% of my estimate of the cost to reflect the market reaction.

again, that is a wild azzed guess and no more accurate than the cost.

survey a few real estate agents and other appraisers.

and pull some more wild azzed guesses out of the air. Misery loves company.

A cost-based adjustment is a valid adjustment in situations like this. Costs are the results of market reactions.

The right answer. Nothing will be more accurate than the cost to cure estimate.

 

[Terrel L. Shields]

the cost to cure includes the cost of demolition

Not necessarily... the cost of demolition is a separate line item in a cost book and you do not have to include that but the buyer is certainly going to consider that. In the case of some minor repair, that demolition cost might be no more than paying the city trash dump $5 to take an old lavatory off your hands.

 

[alebrewer]

A cost-based adjustment is a valid adjustment in situations like this. Costs are the results of market reactions.

Scenario: paired sales analysis indicates that the market reaction to not having two functional baths is $6k. Cost to finish the renovation: $3k. If we apply only the cost to cure, is that truly a reflection of what an adjustment in the SCA should be, or should it be the entire $6k? Or would you call the subject bath count 1.1, as it's 'halfway' finished? Not picking a fight - I'm just not a fan of putting a CTC in a grid. I'd prefer to adjust the subject and comparables 'on their face' for an 'as is' appraisal, and then estimate a CTC in my commentary...

 

[Terrel L. Shields]

paired sales analysis indicates that the market reaction to not having two functional baths is $6k

How do you know that the "market reaction" from a mere 2 sales is an accurate gauge of anything? Perhaps it was the granite countertop was prettier, the appliances a higher quality, the wood subfloor instead of slab foundation. So you hang your hat on a single pairing of dubious quality? At a minimum, a regression analysis of 10-20 sales would be more indicative and I am willing to bet 10 or 100, that particular pairing be it specific repair or "repairs need" 0, 1 - will result in a serious erosion of your R squared and that, in turn, suggests a far more fluid adjustment if any adjustment at all.

 

[alebrewer]

How do you know that the "market reaction" from a mere 2 sales is an accurate gauge of anything?

Generally, I'd use grouped data analysis to extract a bath adjustment, but to your point - yes, pretty much any adjustment that you extract could potentially be attributable to another feature. The requirement is that we have support for our adjustments - not that we're perfect.

Question: if you're appraising an SF, do you adjust for bathroom differences? If so, how do you extract said adjustment?

 

[Mark K]

How do you determine the adjustment for bathrooms in a typical appraisal? Do you do a curable/incurable analysis? Isn't the bathroom adjustment, by definition, reflective of functional preferences?

In most 1 bath houses there's no room to add another bathroom; its just a 1 ba house with the difference in value vs. a 2 ba. easily determined by paired sales; no curable vs. incurable necessary.

In the subject's scenario, there's a bath that needs repaired. If you decide that a functional adjustment is the best way, IMO, you'd need to determine the value of the subject with just one bath and a large closet vs. a 2 bath and also determine, based on the cost to return it to a full bath, whether or not its curable or incurable.

I think that the adjustment belongs more on the condition line, not the functional line.

Hell, if you wanted you could probably call it economic obsolescence using a GRM and difference between the rent for 1 ba. vs. 2 ba. but why go that route when there's a very simple method available.

 

[alebrewer]

In most 1 bath houses there's no room to add another bathroom; its just a 1 ba house with the difference in value vs. a 2 ba. easily determined by paired sales; no curable vs. incurable necessary.

In the subject's scenario, there's a bath that needs repaired. If you decide that a functional adjustment is the best way, IMO, you'd need to determine the value of the subject with just one bath and a large closet vs. a 2 bath and also determine, based on the cost to return it to a full bath, whether or not its curable or incurable.

I think that the adjustment belongs more on the condition line, not the functional line.

Hell, if you wanted you could probably call it economic obsolescence using a GRM and difference between the rent for 1 ba. vs. 2 ba. but why go that route when there's a very simple method available.

Fully agreed about that scenario. My only point was that the grid is for market based adjustments, not cost adjustments. If the market reaction is similar to the CTC, there wouldn't be an issue. It would only be in those circumstances where there is a significant difference between the CTC and the market reaction where the credibility of the results might suffer...

 

[Mark K]

again, that is a wild azzed guess and no more accurate than the cost.

Not really. I've had discussions with brokers (and owned a brokerage at one time) and a general consensus is that adding about 50% to the actual cost is not unrealistic.

Nothing will be more accurate than the cost to cure estimate.

If your C2C includes profit, I'd agree.

Using strictly a C2C bid does not account for the profit motive for the hassle and for the unforeseen potential problems once the repairs are begun. And there's always unexpected, additional items that need covered.