New condition property with damaged flooring "as is."

[George Hatch]

Not just costs+labor, but also the "profit" margin. In excess of the costs.

If my choice is the finished project - with no uncertainties lurking below the flooring - vs the unfinished project then the cost of labor and materials only amounts to a break even for my. I have no incentive to take on the lesser alternative unless there's an additional savings to realize in the acquisition costs. Enough to prompt me to take on the risks of the unknown, arrange for the work to be completed and reward myself with a night on the town with my SO to compensate me for my own time/effort.

You can see that the discounting is like with the before/after pricing of the flips. That difference isn't limited to materials and labor (aka "costs"). Those buyers expect to B paid, whether it's in the form of a flip or a reduced mortgage relative to other properties in similar condition to the "as completed".

 

[alebrewer]

Not just costs+labor, but also the "profit" margin. In excess of the costs.

If my choice is the finished project - with no uncertainties lurking below the flooring - vs the unfinished project the cost of labor and materials only amounts to a break even. I have no incentive to take on the lesser alternative unless there's an additional savings to realize in the acquisition costs.

I'll grant that I'm slow, but I still don't see how that answers the OP's question?

Regarding CTC, do you really believe that the typical homeowner adds in a profit margin? I can see that for investment properties, but I'm not following your logic for repairs for owner occupied properties? Again, though - I'll grant that I'm sometimes slow.

 

[George Hatch]

One of the frustrating things about this forum is that folks, too often, are quick to shoot down opinions offered by others, but don't really offer alternative solutions...

Buyers use their judgement in making their choices without direct reference to their "adjustements". That judgement is based on their analyses of however many alternatives they considered. These buyers are backing their judgement up with their own cash, and they're executing these choices. If that's a legitimate "valuation model" for a buyer to use - and it is - then it doesn't somehow become less legitimate when a professional appraiser does the same thing. Especially when considering the far greater depth of exposure to the market that we use.

As far as I'm concerned, appraisers are walking, talking valuation models. Our judgement is based on our exposure to hundreds and thousands of valuation assignments, each comprised of the analysis for value - of a dozen or more transactions for their respective pricing vs attibutes. So when the pocket protecvtor set to totally discount as illegitimate the value of an appraiser's judgement when used in conjunction with the comparable data; well, lets just say I'm not that impressed.

Outside of FannieWorld we commonly deal with datasets that are so low in both quality (comparability) and quantity that it would make you guys cry. That's why we don't have any illusions about the ability to produce a group sale or paired sale comparison in support of every conclusion we develop. We work with what we have and do the best we can, but sometimes it takes some judgement to fill in the gaps. Omly with houses do people suddenly think the market is so perfect that it's readily possible to support every adjustment.

I positively despise the idea that appraisers can reasonably expect to be smarter about the value than the entire market segment they're analyzing. 50,000 flies can't be wrong.

 

[George Hatch]

I'll grant that I'm slow, but I still don't see how that answers the OP's question?

Regarding CTC, do you really believe that the typical homeowner adds in a profit margin? I can see that for investment properties, but I'm not following your logic for repairs for owner occupied properties? Again, though - I'll grant that I'm sometimes slow.

Again, whether the "return" comes in the form of an actual profit margin upon resale or a net savingsin the costs vs as finished value, it's still a return.

Look at the people who buy fixers to live in. What are their expectations? That their net outlay will be less than the retail value of the finished project, right? There are TV series on cable that address these expectations in vivid detail. It really is a thing.


Just because this deficiency isn't a big line item doesn't mean the fundamentals no longer apply. Only the scale is different. What happens when a home inspection reveals some repairs? It frequently affects the sale price if those repairs aren't completed, and the extent of that effect isn't usually just limited to the costs.

General rule of thumb for remodels and completion of partial construction projects has been costs+50% at a minimum, and sometimes cost+100%. So if it costs $3k to redo the flooring the discount can be projected at $4k or $5k and sometimes more than that depending on what the market conditions are like. In my experience, the hotter the market the greater the discount.

So the constructive suggestion for this adjustment would be to identify the going rate for the discount on fixers in the area and use that ratio in conjunction with the hard costs for this little project. Maybe it's right and maybe it's wrong, but something is better than nothing. Any reviewer or user who thinks they disagree would be compelled to come up with the superior alternative - which if the OP is right about the lack of data - will be impossible for them to do.

BTW, this is another reason to take the CA seriously - complete with the recognition that the CA isn't just the sum of the costs but also includes the consideration of the effects of profit and loss on the results. .

I've done this probably 100 times - at least - over the years and I've never once had a user who actually disagreed with my solution. Nor is this some method of my own device. It's something I learned many years ago from other appraisers who had been doing this before me.

 

[alebrewer]

These buyers are backing their judgement up with their own cash

Or someone else's.

If that's a legitimate "valuation model" for a buyer to use - and it is - then it doesn't somehow become less legitimate when a professional appraiser does the same thing.

Not following again - are you saying the appraisers use a valuation model where they back up their judgment with cash?

So when the pocket protecvtor set to totally discount as illegitimate the value of an appraiser's judgement when used in conjunction with the comparable data; well, lets just say I'm not that impressed.

Again - not following. Who is the pocket protector?

Omly with houses do people suddenly think the market is so perfect that it's readily possible to support every adjustment.

The market is not perfect - in either world. That is why, at the end of the day, appraisers will end up with a range of adjusted values. Remember the reconciliation is to be performed within each approach developed, as well as reconciling the approaches against each other. As far as supporting adjustments, I would hope that commercial appraisers would attempt to support their adjustments, and not base them on their experience with 'thousands of valuation assignments'. That dog won't hunt.

I positively despise the idea that appraisers can reasonably expect to be smarter about the value than the entire market segment they're analyzing. 50,000 flies can't be wrong.

No idea what this statement is in reference to, but I kind of despise the term 'fannieworld' myself...

 

[Peter LeQuire]

A buyer intending to occupy a house needing (in this example) flooring replaced would have the cost of doing so factored into her purchase offer. But she would also adjust her offer down, because she would have to do the work or have it done, hedged further by the positive influence of being able to install the flooring she really wants rather than compromising because what the current owner installs might not tickle her decor fancy. Whether any entreprenurial incentive should be included/added to the cost to cure, and what that incentive ought to be is probably difficult in the extreme to prove. In the Dark Ages while I was working, I'd try to address the effect of such incomplete items in renovated properties by surveying the speculators who were buying older houses and flipping them; talking with the Realtors who were active in the rehab market. But at the end of the day, I'd at least have some supported notion of the cost of hiring someone to complete the work, and enought conversations and file notes to support - not prove, but support - how the market seems to deal with the circumstances the of the OP. And if the adjustments can't be "proven" there's opportunity in one's reconcilliation of the sales comparison approach (discussing the quantity and quality of the available market data) for an appraiser's judgement and reasoning to be shown.

 

[alebrewer]

Buyers use their judgement in making their choices without direct reference to their "adjustements". That judgement is based on their analyses of however many alternatives they considered. These buyers are backing their judgement up with their own cash, and they're executing these choices. If that's a legitimate "valuation model" for a buyer to use - and it is - then it doesn't somehow become less legitimate when a professional appraiser does the same thing. Especially when considering the far greater depth of exposure to the market that we use.

As far as I'm concerned, appraisers are walking, talking valuation models. Our judgement is based on our exposure to hundreds and thousands of valuation assignments, each comprised of the analysis for value - of a dozen or more transactions for their respective pricing vs attibutes. So when the pocket protecvtor set to totally discount as illegitimate the value of an appraiser's judgement when used in conjunction with the comparable data; well, lets just say I'm not that impressed.

Outside of FannieWorld we commonly deal with datasets that are so low in both quality (comparability) and quantity that it would make you guys cry. That's why we don't have any illusions about the ability to produce a group sale or paired sale comparison in support of every conclusion we develop. We work with what we have and do the best we can, but sometimes it takes some judgement to fill in the gaps. Omly with houses do people suddenly think the market is so perfect that it's readily possible to support every adjustment.

I positively despise the idea that appraisers can reasonably expect to be smarter about the value than the entire market segment they're analyzing. 50,000 flies can't be wrong.

and still no offering of an answer to the OP's original question...

 

[alebrewer]

And if the adjustments can't be "proven" there's opportunity in one's reconcilliation of the sales comparison approach (discussing the quantity and quality of the available market data) for an appraiser's judgement and reasoning to be shown.

I love that.

 

[Terrel L. Shields]

also the "profit" margin. In excess of the costs.

EP should not apply. Farmers build a barn to service the business of farming. People repair a defect to make it more livable, not to resell for a profit. After all, EP cannot be realized until the first sale of the property...which will be when?

That's why we don't have any illusions about the ability to produce a group sale or paired sale comparison in support of every conclusion we develop.

That is a valid point but any support we can show creates either real support for the adjustment we have in our head (which is what @ucbruin harps about as "the book"); or, it provides weak support which is generally enough to satisfy the UWs. So I do not normally compound the C2C estimate with the additional burden of estimating some addition amount for the time value of money, the risk, and/or entrepreneurial profit. I let the estimate stand on its own. Unless the repair is going to require months of the house being unlivable, there is no time value of money, the risk is minimal, and EP is nonexistent as far as I am concerned.

There are TV series on cable that address these expectations in vivid detail.

haha...I had to endure a whatever it is called, "Two brothers" or some such at the doctors office. They helped this couple find a house, estimated what they could do on the remodeling budget and all the grand plans they could do within that budget. First rattle out of the bag was damaged trusses in the ceiling. $50,000 over budget instantly. So these guys are pretty liberal...with other peoples money.

I kind of despise the term 'fannieworld'

It is kind of like "waterworld" because you stay underwater a lot.

any entreprenurial incentive should be included/added to the cost to cure, and what that incentive ought to be is probably difficult in the extreme to prove

Which is why I wouldn't try to. You have a dicey estimate in the first place (we've all seen bids 40% or more apart for all sorts of repairs) why compound the error (which is quite possible) by adding a fairy dust amount for some intangible concerns?

 

[George Hatch]

EP should not apply. Farmers build a barn to service the business of farming. People repair a defect to make it more livable, not to resell for a profit. After all, EP cannot be realized until the first sale of the property...which will be when?

Hang on there. The benchmark I used for the comparison is the acquisition prices of the before vs the after. So the farmer's comparison would be between the alternatives of purchasing the one property that needs the additional work in order to have the same utility as the other property which is already in that condition. It isn't an analysis of why people improve their properties.

That is a valid point but any support we can show creates either real support for the adjustment we have in our head (which is what @ucbruin harps about as "the book"); or, it provides weak support which is generally enough to satisfy the UWs. So I do not normally compound the C2C estimate with the additional burden of estimating some addition amount for the time value of money, the risk, and/or entrepreneurial profit. I let the estimate stand on its own. Unless the repair is going to require months of the house being unlivable, there is no time value of money, the risk is minimal, and EP is nonexistent as far as I am concerned.

Appraisers whose default is "the list" aren't working any valuation model - they're just saying they are. No valuation model can work unless the appraiser actually works it. So that's not the equivalent of an appraiser recalling the results of other appraisals of homes they've done where the spread in this price range between the house with the 3-car vs 2-car garage was $5k, and using that judgement in lieu of having any other direct comps with a 3car garage like their subject has. They didn't "support" their adjustment in the report but that doesn't make that adjustment any less reasonable.