How to adjust for foundation cracks.

[Bill_FL]

What is your scope of work? Are you trying to figure out what the home is worth "as-is" or "as if the stupid crack wasnt there"?

The above posts are pretty good. Call for a structural engineering report. If I were doing the appraisal "as-is" the report would be in my hands before I did anything further than going on site. Then, I would have about 3 contractors bid on the fix for me to get an idea of what the remedial costs are.

Not sure what kind of foundation it is, but if its a basement, I have seen some of these fixes. Big slabs of plate steel bolted to the walls with I beams driven through the slab into the earth, then up the walls. Luckily, this was not an appraisal I had to do, because the first thing I thought a typical buyer would do when seeing that is run like the wind to a house that was not needing to be propped up; that was built correctly the first time. I began to wonder, and I have not done any studys on it, but would there be some sort of long term stigma on a property like that because of the "fix".

 

[Brian Hietpas]

This is a concrete block foundation.

This is a 50+ year old home. Most houses have some stair cracks which are typical for the market due to alot of clay in the soil. However, this particular property has many more than I typically see along with some horizontal cracks. I say non-typical because I haven't seen alot of homes that have cracks to this extent.

This is an estate appraisal ordered by an attorney. A family member is interested in purchasing it.

 

[Wendy]

......ordered by an attorney.......

You can bet he is protecting himself on this. Please be very careful here!

 

[Restrain]

In the DFW area of Texas, virtually every home has settlement. The only question is how much? What is accepted is that we disclose and comment. If all the sales are generally expected to have similar settlement, no significant adjustment except for cosmetics. If it's excessive, we comment and recommend an engineer's inspection, noting the value may change on the basis of the inspection. It's not uncommon to make large adjustments for significant foundation damage as well, as we've seen enough and have enough data to estimate the cost to repair.

So, in your case, I would comment, do a CYA, and adjust on the basis of observed damages and needed cosmetics.

 

[Webbed Feet]

In the DFW area of Texas, virtually every home has settlement. The only question is how much? What is accepted is that we disclose and comment. If all the sales are generally expected to have similar settlement, no significant adjustment except for cosmetics. If it's excessive, we comment and recommend an engineer's inspection, noting the value may change on the basis of the inspection. It's not uncommon to make large adjustments for significant foundation damage as well, as we've seen enough and have enough data to estimate the cost to repair.

So, in your case, I would comment, do a CYA, and adjust on the basis of observed damages and needed cosmetics.

Mr. Strahan,

Golly gee! Errrr Let me see here... .what did that definitions section say? .. Oh Yes!

EXTRAORDINARY ASSUMPTION: an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions.

Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

I guess you meant to say use an EA, but just don't call what said to be that since USPAP doesn't demand we use those exact words... huh?

Webbed.

 

[Mike Boyd]

Get an engineer's report and have the engineer estimate the cost to cure. They are TRAINED for that, we are not. However, you need to make the report subject to the recommended repairs being completed.

I did an appraisal this morning across the street from a hill that is commonly known as "Moving Mountain." The name should be self explanatory. About 15 years ago, a shopping center was built at another location across from this hill. There was a lot of controversy from the residential neighbors about the project because of the soil conditions. The developers had many engineering reports done and agreed to reinforcements and mitigation. That mitigation was done before any construction started. Lo and behold, during construction of the buildings, Moving Mountain started doing its thing and new reports required that everything to that date had to be torn out and rebuilt with even more pilons or caisons, retaining walls, underground drainage and I think they even tapped the underground natural reservoirs to connect to the areas water supply district. For my report this morning , as this house was damaged and repaired at the time of the new shopping center incident, I will make note that it is in an area of unstable soil conditions but that mitigations were completed several years ago and require that the current owner provide copies of any and all reports. This is NOT for an FHA loan.

 

[Webbed Feet]

The Foundation Crack Adjustment Method.

Ms. Ultraviolet,

Boy, I have to join with Timid on this one.

For starters structural problems do not always have something to do with the “Neighborhood.” If they do, the entire neighborhood is in very deep doo do, and claiming it to be “typical” is going to be incredibly dumb. Does concrete crack?.. Yes, it does. Is it a neighborhood issue? .. How do we prove what is going on at one property is a result of signs of something similar at other properties? No bloody way. Unless it is a well known issue. And if it is, I sorta bet it was PROVEN by other experts, not appraisers. Or was on the news locally and nationally a few times. If the entire neighborhood is built on a sliding hill “typical” is not going to be much of an escape for anyone when it comes to the market value of their houses. Stating that:

Good appraisers who know the neighborhood can usually tell the difference and will be able to rate the condition of the property accurately.

would be arrogant to do in practice when it comes to structural issues. Two houses of similar design and age, with similar appearing foundation cracks, could have a $10,000 cost of repair at one, and a $50,000 cost of repair at the other. All in the same neighborhood. Or even greater gap in the difference in the costs of repair. You're going to actually claim you can analyze and report on what is going on underneath of those houses with credibility? ..With no professional third party inspection? ..Maybe your upper managers have provided you with the one special market adjustment for “Settlement” off of that magical “List of Adjustments” they gave you?.. Maybe they gave you a factor they Googled to use to multiply by the 16th of an inch of crack spread? .. Let me see here, subject has a 2 5/16” crack, comp one a 1 2/16” crack, the factor per 16th says the adjustment is minus $xx,zzz because that comp has a superior crack! ..But comp 2 has a 3 1/16” crack making it inferior so we add.......

It would be interesting to have you post how they have you extracting that adjustment from the market to use for comps with different size or shaped cracks and ones with no cracks at all. It could be a sticky! The Foundation Crack Adjustment Method. Or TFCAM.

When you ask:

What is the true condition of the property?

you raise a question that takes an engineer to answer. Golly, tell me how credible a market value opinion is when based on “I have no idea. But I called it fair condition!”

The lender is concerned with the true condition and marketability of the property. The two sides are approaching the problem from different angles and they rarely meet. After being inside the lending world I've finally grasped the value of the "as is" appraisal.

If the cracks are significant and compromise the integrity of the structure then it's FAIR (or even poor) condition. Lenders generally don't want properties that have structural issues, for obvious reasons. If the appraiser makes the appraisal "subject to" any inspections or conditions then the UW is free to waive them to make the loan. When the condition is fair or poor the loan generally won't be made, with no weasel room for the LO or AE. A list of "subject to" items can be buried and THAT'S when the appraiser's *ss will be on the line. Think about where the true liability lies ...

If any lender is actually concerned with the “true” condition, meaning the real costs of repair, then that lender should want an engineer's report... Not some appraiser's wild *** guesses. ... If the lenders do not trust the reports of engineers hired by interested parties, then the lenders should stop telling the interested parties to hire the engineers and the lenders should hire those engineers themselves! .. If lenders have issues with their UWers, then the lenders should take care of that! Funny thing, PDF files can be hacked and the words “fair” or “poor” altered just as well as anything else in those reports.

You are very correct when you say:

If the cracks are significant and compromise the integrity of the structure then it's FAIR (or even poor) condition. Lenders generally don't want properties that have structural issues, for obvious reasons.

This is why the rule has always generally been either make market acceptable repairs or no loanee! Hence, “subject to” required repairs, or inspections, to see if repairs are really required or not. Tell me, just exactly what is the value of a CB1 appraisal, of a property with structural issues the lender cannot allow for the loan type applied for? You may have “grasped” it, but somehow the concept is still escaping me.

So what is really being accomplished here? What is really being accomplished is real estate loan transactions, even with a condition rating of “FAIR” in an appraisal report, can still be sold. IF they can get their hands on a “As Is” CB1 using report with enough value to it. AND it is not politically popular with real estate brokers and sellers to be told an engineer's report is required. Nobody likes the delays, and many of them do NOT want the truth uncovered! It just isn't conducive to everyone's transaction, don't you know? Seems like to me your management found the solution to not ticking off other parties to the transactions, they don't want ticked off, and how to increase that pipeline of loans. Just brainwash the staff appraisers by using pressure to convince them CB4 is so horrible and not to be used. ... It's all just a dirty, rotten, Fannie trick to get the lenders!!!!! Besides, this way they can turn around and offer a loan to the borrower that wasn't the loan the borrower applied for. A nice profitable very high interest rate loan. Sub-prime lending appraisal training. “Gosh Mr. Borrower, we are so sorrrrrry your homes coooondiiition was not adequate for this loan.. But we diiiid get a “As Is” appraisal for you so we have this Oooootther loan available for you! .. Now if you'll sign here, and here, and over here....... ”

Either that or you were really using CB4 for non-structural issues and calling for inspections of simply worn out short and long term items. At least that would make saying:

I recently drove properties with my upper management and was mercilesslly criticized for using CB4 when I should've called the properties fair or poor ... lesson learned

make a whole lot more sense to me than saying they pulled that over serious structural issues.

Webbed.

 

[Ultraviolet]

Webbed,

You really spend a lot of time criticizing the details of posts instead of seeing the bigger picture ... :new_smile-l:

As I'm finding, the devil is NOT in the details of residential appraising. The UW wants a bigger picture of the property and its marketability which is something I was never able to "grasp" until working inside the process.

If the property is in FAIR condition then say so with out all the BS CB4 CYA.

The majority of my work is portfolio - not salable - and there's no BS *****footing around the issues with the property. The problem is that there's a disconnect between the fee and staff appraiser perspectives. Nobody is trying to get me to misrepresent condition to sell the loan, it's more that I am retraining myself from relying on CB4 BS when a property is in fair condition.

It doesn't take an engineer's report to determine fair or poor condition of a property, in the context of my SOW. If a property has potentially expensive structural problems then it's fair condition and we don't make the loan - period. Again, it's not Fannie, it's portfolio. It's actually quite refreshing to just appraise the stupid property without worrying about the liability and secondary market backlash.

I'm not sure what your point is, Webbed, except that you seem to enjoy spending time pointing out how smart you are and how obviously stupid I am ... Knock yourself out ... :laugh:

 

[Chelley Bahner]

Webbed,

You really spend a lot of time criticizing the details of posts instead of seeing the bigger picture ... :new_smile-l:

As I'm finding, the devil is NOT in the details of residential appraising. The UW wants a bigger picture of the property and its marketability which is something I was never able to "grasp" until working inside the process.

If the property is in FAIR condition then say so with out all the BS CB4 CYA.

The majority of my work is portfolio - not salable - and there's no BS *****footing around the issues with the property. The problem is that there's a disconnect between the fee and staff appraiser perspectives. Nobody is trying to get me to misrepresent condition to sell the loan, it's more that I am retraining myself from relying on CB4 BS when a property is in fair condition.

It doesn't take an engineer's report to determine fair or poor condition of a property, in the context of my SOW. If a property has potentially expensive structural problems then it's fair condition and we don't make the loan - period. Again, it's not Fannie, it's portfolio. It's actually quite refreshing to just appraise the stupid property without worrying about the liability and secondary market backlash.

I'm not sure what your point is, Webbed, except that you seem to enjoy spending time pointing out how smart you are and how obviously stupid I am ... Knock yourself out ... :laugh:

I completely agree with Timd and Webbed. That's why the "subject to" box is there to begin with. How do you know the condition of the foundation is fair? There could be problems beyond what your eye can see. It could be poor or worse and I don't think many appraisers are qualified to make that determination based on an Appraisal 101 class and some CE classes taken every few years.

It would be nice if we didn't live in such a blame-happy world, but the fact of the matter is we do. People like to the point the finger. You have to cya. My old mentor once told me about a house he appraised with foundation problems when he was new to the business. He prepared an "as-is" report on a house he thought had "normal" cracks in the concrete. It was foreclosed on shortly after and the bank couldn't sell it for his appraised value, so they started poking through his report. They sent another appraiser out who noted the problem and stated that it should be inspected. A structural engineer visited the property and estimated about $10k in repairs. They took him to court. He had to buy it at his appraised value and still turn around and put the $10k into it to get the foundation fixed before he could sell it and move on. All in all, he lost $10k because he thought he knew more than he did. If he'd have just marked the "subject to" box, it would have been the bank's responsibility for not having an inspection made as recommended.

I do a lot of REO work. A lot of those properties are pretty beat up. When I prepare those reports, I comment on the stuff I know about. Carpet, paint, cabinets, windows, etc... When it comes to items that could potentially affect the soundness or structural integrity, I don't mess around. I let them know that an inspection by a professional proficient in that field needs to be made. There's even a line for recommended inspections on the REO form.

The devil IS in the details. Look what happens when a value is off. How liable would your state board consider you? Would you worry about liability then?

 

[timd354]

Webbed,

You really spend a lot of time criticizing the details of posts instead of seeing the bigger picture ... :new_smile-l:

As I'm finding, the devil is NOT in the details of residential appraising. The UW wants a bigger picture of the property and its marketability which is something I was never able to "grasp" until working inside the process.
The UW may want the "bigger picture" about a property, but sometimes the bigger picture cannot be accurately described without the details. But I do understand what you are saying.

If the property is in FAIR condition then say so with out all the BS CB4 CYA.
If a property is obviously in Fair or Poor condition then by all means say so. The problem is that often, when it comes to foundation issues, it is often not obvious whether or not the cracking, etc. that the appraiser observes is just cosmetic in nature (in which case the house may be in average or even good condition), or whether it is indicative of a structural problem (in which case the house may be in fair or poor condition).

Even assuming that the appraiser is able to make the determination that a property is in fair or poor condition due to obvious foundation problems, then there comes the problem of the valuation of such properties. The appraiser may be able to make a reasonable judgment that a property has some obvious foundation and structural issues in some cases, but, how is he going arrive at a credible opinion of value of the property without having any idea as to the cost to cure (Most appraisers are just not qualified to determine whether that obvious structural issue with the foundation is $25,000 problem, a $50,000 problem, or a $100,000 porblem). Without knowing this, the cost approach is out the window since there is simply no credible way to determine the amount of physical depreciation. As far as the sales comparison approach goes, maybe in some cases it is possible to extract the market reaction to a property with obvious major foundation/structural problems where the cost to cure is unknown. But, in most cases I doubt that this is possible since most potential buyers are going to have some sort of estimate of the cost of repairs done before determining whether or not to purchase such a property and the purchase price that the buyer is willing to pay is going to be determined in part based on the cost to cure.

The majority of my work is portfolio - not salable - and there's no BS *****footing around the issues with the property. The problem is that there's a disconnect between the fee and staff appraiser perspectives. Nobody is trying to get me to misrepresent condition to sell the loan, it's more that I am retraining myself from relying on CB4 BS when a property is in fair condition.

It doesn't take an engineer's report to determine fair or poor condition of a property, in the context of my SOW. If a property has potentially expensive structural problems then it's fair condition and we don't make the loan - period. Again, it's not Fannie, it's portfolio. It's actually quite refreshing to just appraise the stupid property without worrying about the liability and secondary market backlash.

I took the liberty of putting the word "potentially" in your answer in bold since your use of this word illustrates my point...you had to include this word in your answer, because you know that sometimes the appraiser just does not know the answer as to whether or not a potential problem is a expensive structural problem or not. If this was not the case, then you would not have included the word potentially in your answer.

If you think that you don't have to worry about potential liability for making such judgments just because the appraisal is for a portfolio loan then you are just kidding yourself. Believe it or not, lenders may sell all or part of their loan portfolio down the road. Additionally, if the portfolio lender takes a huge loss on a loan due some misjudgment that you made in your appraisal report, do you really believe that the portfolio lender is any less likely to sue you than a secondary market investor or Fannie Mae? If you really think that is the case, then you live in fantasy land. Additionally, what about the buyer whose loan was denied (and as a result he lost out on the purchase) by your portfolio lender based on your appraisal report which stated the property was in fair to poor condition because of foundation cracks you observed...what if it turns out those cracks were just cometic in nature or just required a minor repair? Do you not see any potential liability in that case?

If you want to appraise properties without worrying about liability and make judgments that you may not be qualified make just because you are working for a portfolio lender who basically tells you not to worry about it, then that's your call. I wish you luck

I'm not sure what your point is, Webbed, except that you seem to enjoy spending time pointing out how smart you are and how obviously stupid I am ... Knock yourself out ... :laugh:

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