Deferred Maintenance - Cost to Cure

[jpsavage]

My comment / question:

Lenders require us to comment on any minor repairs, deferred maintenance, etc and assign a "cost-to-cure" amount on the front of the report in the condition section.

Are we also required in the sales comparison grid to insert a line item adjustment to the comparables for this cost to cure amount? If so, what do you title it???? Repairs, Deferred Maintenance, etc. ???

 

[jtinmichigan]

I will typically adjust for this under effective age or condition with explanations below. Such as CONDITION: FAIR TO AVG or AVG/def maint or AVG/repairs and make the adjustment there. Again with comments explaining what you are doing in the comments section.

 

[Richard Carlsen]

Are we also required in the sales comparison grid to insert a line item adjustment to the comparables for this cost to cure amount? If so, what do you title it???? Repairs, Deferred Maintenance, etc. ???

Now think about it a minute. If you take a cost to cure adjustment you are adjusting the subject which we never do.

I consider the cost to cure as part of the condition of the property and reflect it in the effective age. The the difference between the condition of the subject and a specific comp becomes roughly the cost to cure and is taken as an adjustment against or for that comp. Example, subject has effective age of 15 with comp 1 having an effective age of 18. Estimated cost to bring comp 1 up to even condition with the subject is $6000. That works out to $2000/year adjustment on effective age. A +$6000 adjustment is made in the effective age line for the comp. It's a simple way of reading the market and estimating variations in condition of subject and comps. Here's my starting comments in the condition line on page 1 of the URAR:

OVERALL CONDITION is AVERAGE FOR AGE based on market expectations of similar age properties. Unless otherwise noted, above materials conditions are considered average. For grid comparison, the condition of the property and comps is reflected and adjusted using the Effective Age assigned based on best information available. Existing condition, upgrades, renovation, remodeling, etc. are all considered in the Effective Age. NO NOTED REQUIRED REPAIRS OR DEFERRED MAINTENANCE.

From this canned comment, I can expand by inserting specifics about the subject property as I want and need but the basis for my grid adjustments are noted to the reader in this section.

 

[jpsavage]

Thank you very much!

 

[Mike Kennedy]

To prevent previous abuses of "Effective Age" utilization in market data comparison grids resulting in Inflated Valuations Fannie specifically designed the 2005 report forms ( i.e. 1004_05 et al) to require specific ACTUAL age in SCA Grid - NOT Effective Age. Deferred Maintenance is a CONDITION factor adjusted for under CONDITION - not Age IF/AS indicated by extraction from/comparison to the Comparable Sales in the Grid.

 

[Jason Barber]

jp, first off I would try and find comparables that are of equal condition to the subject and avoid all this mess. If thats not realistic, then why not mark the appraisal subject to repairs based on HC that repairs have been completed?
I personally would avoid making any adjustments in the grid unless you can extract that data from the market... meaning you can determine what the average buyer would pay for the subject with stated repairs and without stated repairs. Some repairs might not necessarily receive a higher price from the market although they would incur a cost.
I'm not sure I agree with Richard's method. Sure, those are costs estimated to make comparables equal with the subject, but what is the market reaction? Thats what your adjusted value should be.

 

[Richard Carlsen]

To prevent previous abuses of "Effective Age" utilization in market data comparison grids resulting in Inflated Valuations Fannie specifically designed the 2005 report forms ( i.e. 1004_05 et al) to require specific ACTUAL age in SCA Grid - NOT Effective Age. Deferred Maintenance is a CONDITION factor adjusted for under CONDITION - not Age IF/AS indicated by extraction from/comparison to the Comparable Sales in the Grid.

I know they did. And I used to put the the condition adjustment in the grid using phrases like Avg, Below Avg, Abv Avg, etc. Every once in a while, when one of the comps required an adjustment due to condition, I would have an UW come back and ask for an addendum note stating my justification for the adjustment. So I went to making the condition adjustment based on the effective age and put the E-15 type of notation in the condition line. Then I had several UW's come back and ask me why I was doing that (despite the notification in the Condition section). Two UW's told me flat out that posting the effective age is not enough on the condition line; that it is mandatory to have a word in there. (i.e. Below Avg, Avg, etc.). OK. Since these UW's are the ones responsible for the reports that go to FNMA, I decided they must know exactly what they are doing and exactly what they went in the way of reporting of my making a condition adjustment in the sales grid.
Now the age line has only the age entered (actual or estimated) and the condition line has something like Avg/E 15 or Below Avg/E 22. On this basis, and only effective age against effective age do I make the comparative condition adjustments. To date since going to this type of grid entry, I have not had an UW question my adjustments when coupled with comments in the Sales Data Summary. No calls on it means to me that the reader understands my reasoning and methodology; and that is, as we all know, a requirement for Summary Appraisal reports.

I'm not sure I agree with Richard's method. Sure, those are costs estimated to make comparables equal with the subject, but what is the market reaction? Thats what your adjusted value should be.

I will admit that it is sort of a SWAG but one that I consider a Professional SWAG based on my 5,200 completed appraisals and 33+ years in the real estate profession. There are times and markets where the limited numbers of exchanges do not provide sufficient numbers for contributory values to be extracted from the market data. In those cases, it is incumbent on the appraiser, based on geographical competence, education and experience to make judgments as to the estimated market impact of certain deficiencies or attributes of a property and to do so in the sales grid. It is most often based upon my qualifications that I make these
judgments in the essentially low density, rural market of Northern Michigan.

Making those kind of judgments is why the client pays me and what they expect from me.​

 

[Mike Boyd]

I will typically adjust for this under effective age or condition with explanations below. Such as CONDITION: FAIR TO AVG or AVG/def maint or AVG/repairs and make the adjustment there. Again with comments explaining what you are doing in the comments section.

Most underwriters will reject a dual condition such as "fair to average" or "good to average,"

They want good, average fair or poor. No in betweens. An in between adjustment is a cop out and says nothing. You can explain it on a comment page. However, you are correct in where to make the adjustments.

 

[Richard Carlsen]

I will typically adjust for this under effective age or condition with explanations below. Such as CONDITION: FAIR TO AVG or AVG/def maint or AVG/repairs and make the adjustment there.

And this hearkens back to a very basic question: When making a Below Avg to Avg adjustment for condition in the Sales Grid, upon what do you base the dollar amount of the adjustment in the sales grid? Any adjustment made in the sales grid has to have a basis upon which it was made. As I said, I make mine on the basis of the perceived effective age and estimated cost to cure to bring the inferior to the condition of the superior which results in a + or - dollar adjustment. I think I can easily justify that.

But what is the basis used when making a dollar adjustment and going from Below Avg to Avg or visa versa?

 

[Jason Barber]

I will admit that it is sort of a SWAG but one that I consider a Professional SWAG based on my 5,200 completed appraisals and 33+ years in the real estate profession. There are times and markets where the limited numbers of exchanges do not provide sufficient numbers for contributory values to be extracted from the market data. In those cases, it is incumbent on the appraiser, based on geographical competence, education and experience to make judgments as to the estimated market impact of certain deficiencies or attributes of a property and to do so in the sales grid. It is most often based upon my qualifications that I make these
judgments in the essentially low density, rural market of Northern Michigan.

Making those kind of judgments is why the client pays me and what they expect from me.

Fair enough Richard... and very well stated. I'm sure your comments on the sales comparison addendum relate something similar to what you just said. Just wondering... have you ever been questioned on those adjustments from a reviewer or had to defend them in court?