Cost to cure or Not?

[Jonathan Anderson]

Have a question of clarity.

had a client ask me to remove the cost to cure on an appraisal report and simply mention the issues of repair and do the report "as is".

I frankly don't see how it is possible to do an appraisal "as is" that has repair issues and not apply a cost to cure.

I appreciate any help. Is this a violation of USPAP. Does this create a mis-leading appraisal report?

Any sound advice would be great.

Thanks

 

[Ted Martin]

Cost to cure is not necessarily a dollar for dollar adjustment. Personally I prefer to make the appraisal "as is" rather than "subject to" and have to develope a cost to cure. You still need to describe the repair needs and make to appropriate adjustments to the comparables (if needed, since most of mine are REO's and I use other REO's in similar condition adjustments are not always needed). Sort of sounds to me like you can comply with thier request to do the appraisal "as is" rather than "subject to" but the description of the repair needs and appropriate adjustments to the comps is still necessary. Hopefully they won't have a cow because of the lowered value.

 

[Webbed Feet]

Mr. Anderson,

That's easy... Make sure you use all comparable with the same or similar repair issues. Then do a good job of accounting for the market reaction to the needed repairs in your other approaches.

Barry Dayton

 

[Webbed Feet]

Cost to Cure

A fascinating topic of “Cost to Cure”.. I find it just amazing how it is that well educated, professional, and experienced appraisers continue to toss the terminology around... When personally, I cannot find five residential appraisers, in any room at the same time, who can agree on what it means or how to apply it... Undefined under USPAP, which says simply that “Cost” is either a fact, or an estimate of fact.. Unfortunately, I find most appraisers using this “Cost to Cure” are normally making nothing more than an unsupported opinion...Using not any sort of “Cost to Cure”, but only costs as would be found in new construction and / or purely their opinion made up off the top of their head.... Especially inappropriate for your basic refinance and purchase residential appraising.

Let’s look at some actual definitions of “Cost-to-Cure”, as written by Lord knows who in some cases, and try and imagine how it was it came to pass residential appraisers started so abusing the terminology.

Cost-to-Cure – The circumstance where damage to the remaining property in a partial taking may be cured by remedial action performed by the owner or by the Government. The cost-to-cure is a measure of damage only when it is not greater than the decrease in the market value of the remainder. When the cost-of-cure is less than the severance damages, the United States may pay the cost-of-cure (UASFLA, 1992, P. 35).

Cost of Cure - This method is similar to the Cost of Repair method, but it calculates the expenses that are needed to bring a damaged tree as close to its original condition as possible.

Part VI Acquisition Analysis 90 (From partial acquisition)

A-30. Allocation and Explanation of Damages. Damages, as such, are not appraised. However, the appraiser shall briefly explain any damages to the remainder property and allocate the difference in the value of the property before and after the acquisition between the value of the acquisition and damages to the remainder. The appraiser should note that such allocation is an accounting tabulation and not necessarily indicative of the appraisal method employed. If damages have been measured by a cost to cure, the appraiser must justify the cost to cure 91 and demonstrate that the cost to cure is less than the damage would be if the cure was not undertaken. 91. This may require the services of a consultant; see Section D-4.

Personally, I find a court case in Oregon interesting in Department of Revenue v. Grant Western Lumber Co. as it examines “Cost to Cure” and what it is.

4. The parties also agree that there is a difference between functional obsolescence caused by a deficiency and functional obsolescence caused by a defect. A deficiency means the subject property is missing some machine or equipment (machine) and therefore incurs greater operating costs than a plant with that machine. A defect means that a machine in the subject plant is less efficient or more costly to operate than a machine performing an equivalent function in the modern plant. These definitions are consistent with the terms "deficiency requiring an addition" and "deficiency requiring substitution or modernization" contained in the 11th edition at pages 388 through 389.

The concept of "cost to cure" is largely undisputed by the parties. It is the cost that would be incurred in changing the subject property to correct the flaw. If the subject property suffers from a deficiency, the cost to cure would be: (1) the cost of the missing machine, and (2) the cost of installing that machine. The parties agree that installing a machine in an existing property may be more expensive than installing the same machine when a plant is constructed new. To the extent the cost is greater, it is referred to as "excess" cost.

If the subject property suffers from a defect, the cost to cure would be the total of: (1) the cost to remove the defective machine, (2) the remaining DRC of the defective machine (6) (less its salvage value), (3) the cost of the new machine, and (4) the cost of installing the new machine.

The dispute between the parties arises not so much from the concepts as from the calculations applying the concepts. That may be due to the fact that when calculating functional obsolescence, one is hypothesizing an addition in order to calculate a deduction. This mental gymnastic requires one to consider market motives while staying true to the assumptions of the cost approach. Because cost is used as a surrogate for value, calculations of functional obsolescence must relate to the cost of the subject property.

Confusion may also arise from imprecise application of the concepts. It is important to understand that cost to cure is not the same as functional obsolescence. The distinction is important because curing the flaw results in a different property than the subject property whose value is being determined.

As we can see from a court case.... there appears to be a whole lot more to “Cost to Cure” than what the typical residential appraiser bothers to consider when opining a dollar amount regarding it. Perhaps all residential appraisers should be required to include in their reports a definition of “Cost to Cure” before being allowed to state what one is.

Barry Dayton

 

[Fred]

Any sound advice would be great.
Thanks

Yes indeed.

I agree with you it would be hard (ie impossible) to do an “as is” value without cost-to-cure estimates. The most effective way of doing these is to take the as-cured value, less cost-to-cure, less profit, equals present value.

Some suggested using comps with the same repair issues. In practice, the only way to know about the similarity of repair issues and market reaction to repairs needed is by estimating the cost to make the repairs.

 

[hastalavista]

I think Ted is touching on this, but I’ll throw my 2-cents in also.

If you are defining the “cost to cure” as the cost it would take to “fix” or repair the item in question, that may or may not reflect the market reaction to the item being in a “broken” condition.

For example, if the market is “hot” and many buyers are chasing few available listings, deferred maintenance and minor repair items may have little or no impact on value. In a stable market, the reaction may be close to what the actual repair cost would be. In a declining market, where sellers exceed buyers, the effect of deferred maintenance on market value may exceed the cost of the actual repair (call it the “pain in the ***” factor; why should I buy your house I have to repair, even if you discount it the cost of the repair, when there are numerous alternatives available without the hassle?).

So, in order to make the appraisal “as is” (which is certainly an appropriate appraisal option), you really need to analyze how the market is going to react to purchasing the home with known costs; and be prepared to make (and explain) adjustments which may or may be dollar for dollar.

 

[CANative]

Should we be more careful now days in doing these "as-is with cost to cure" appraisals in light of the new supplemental standards imposed by Fannie Mae thorugh their forms?

It's kiind of a blurry line or a grey area where minor deferred maintenance items start becoming issues which affect livability, soundness or structural integrity.

Also items which are signficant enough to be addressed by a cost to cure can indicate the presence of more serious deferred maintenance.