Property Condition Adjustments With No Comps Available

[Andee]

Hi All-

I'm working on a property that has structural damage and would be considered in a C6 condition. I'm trying to find a different way to adjust for condition for available comparables within the market as there are no properties in C6 condition. My biggest problem I'm finding is that I'm in a non-disclosure state and many of the "Rehab & Flip" properties never make it to the market or the sale is never reported in a public forum and the buyer/seller is not willing to give you the information. It used to be that you could find C5 & C6 properties but they are almost a thing of the past.

Many of the properties in this particular area are in C3 condition and very few C4 condition properties. These are older starter homes that many of the owners will completely paint, change out flooring and about half have remodeled kitchens and baths with the other half having the same rooms in really good condition, most of these homes are really taken care of (including the properties with the wood panel walls). So, I'm willing to take any suggestions on making an adjustment to my C3 comps when I have no C6 comps available.

Thanks

 

[NachoPerito]

One thing you can do:

Take the effective age difference between comp and subject. Divide it into economic life. apply that to the sale price, but take out 20-50% for land value first.

example:
(20-32)/50*$500,000*(60%) = -$72,000 or a -14% adjustment

 

[J Grant]

Have you consulted with the client? Because if for lending purpose , ,most clients require a C 6 or C5 home be done subject to bringing to C 4 condition. Also a true C 6 property might be so deteriorated it might contribute little or nothing to site and be a tear down candidate? (HBU).

 

[Mr Rex]

Call some local fix and flip investors.

 

[hastalavista]

Your problem seems to be data.
You might not find enough (assuming this is a residential mortgage finance appraisal, and given that typical SOW expectation) to complete the analysis credibly.
I agree with JGrant: First thing to do is to contact the client.

If they want you to proceed, I would (likely) require additional time and an increase in the fee.
If they want you to proceed, Rex's advice is a good starting point.


This is a complex assignment. I don't know if your license level indication is correct, but if a trainee, you should also be confident that your supervisor is competent in this kind of assignment.

Good luck!

 

[Andee]

Have you consulted with the client? Because if for lending purpose , ,most clients require a C 6 or C5 home be done subject to bringing to C 4 condition. Also a true C 6 property might be so deteriorated it might contribute little or nothing to site and be a tear down candidate? (HBU).

This is a private client that knows the condition of the properties. He rehabs and flips homes but wants an independent appraisal because he works with the banks on taking a short sale and most of the bank appraisers will not consider all the damage that has been done to the property. In fact, he had the banks appraisal that did not take into consideration the structural damage, just noted that there was a broken window and drywall damage in the laundry area with not cost for repair on those items, that the interior needed to be painted, the fence repaired and the trees trimmed for a grand total of $3,500, yet there is drywall damage throughout with broken tiles in laundry, kitchen and bath and it needs 17 piers on the foundation (he had it inspected). Somehow completely missed the dead rat in the dining room and the one in the attic.

 

[Andee]

Your problem seems to be data.
You might not find enough (assuming this is a residential mortgage finance appraisal, and given that typical SOW expectation) to complete the analysis credibly.
I agree with JGrant: First thing to do is to contact the client.

If they want you to proceed, I would (likely) require additional time and an increase in the fee.
If they want you to proceed, Rex's advice is a good starting point.


This is a complex assignment. I don't know if your license level indication is correct, but if a trainee, you should also be confident that your supervisor is competent in this kind of assignment.

Good luck!

I just updated my license level, I realized that when I posted that it still said trainee. I have done work for this client in the past and he usually has HUD1s for me on other homes he has rehabed, however, this area is a first for him and the bank actually called him to see if he wanted it because he has worked with them in the past.

 

[Deleted member 130081]

This is a private client that knows the condition of the properties. He rehabs and flips homes but wants an independent appraisal because he works with the banks on taking a short sale and most of the bank appraisers will not consider all the damage that has been done to the property. In fact, he had the banks appraisal that did not take into consideration the structural damage, just noted that there was a broken window and drywall damage in the laundry area with not cost for repair on those items, that the interior needed to be painted, the fence repaired and the trees trimmed for a grand total of $3,500, yet there is drywall damage throughout with broken tiles in laundry, kitchen and bath and it needs 17 piers on the foundation (he had it inspected). Somehow completely missed the dead rat in the dining room and the one in the attic.

You should withdraw.

Your client knows what the property is worth by using C4/C3/C2 comps and you should too. If you don't, you don't understand how your market works. What is the intended use of the assignment here? This is not a mortgage appraisal. This is not for the bank or for a portfolio. This assignment is for purposes of price negotiation. None of the mortgage world BS applies. Your client wants your professional signature on the bottom of a piece of paper he is going to show the bank, in order to convince them of a lower selling price than their own appraiser came up with. You are charging them good money for this service and have a professional and legal obligation to perform the assignment competently.

Who are the likely buyers for a property like your subject? Rehabbers right? A traditional/typical buyer would run, so the property is not marketable to a typical buyer right? So that leaves rehabbers who are happy to buy it right? What do you know of rehabbers? Do they purchase property like a typical buyer? No they don't. So the question is, how does your likely buyer in fact purchase property?

I know you do not know the answer because of the question you asked in the first place, which is why I think you should withdraw. If you accepted the assignment at all, you should have disclosed to your client your lack of experience with the property type (distressed) and let them know how you would go about acquiring the necessary skills and knowledge to do the appraisal competently. In this case, you don't know what you don't know and now you have gone further than you should have. Shame on you. That said, most of us have made the same mistake in our careers along the way too and for that reason, I am going to give you the answer you need. However, don't ever accept an assignment you are not familiar with again. If you simply want to run at this point, then you can tell your client there are no comps and therefore you cant develop a credible appraisal - you could save face that way and would not be lying either.

Or, if you want to go through with it, you can use the typical rehabber formula to calculate adjustments. This will require that you know a few things from your client. You need to know exactly what they intend to repair and what they will not repair, what their expected/needed profit will be, what their holding costs will be, what the sale/closing costs will be - both at purchase and at resale, and finally what their loan costs (if any) will be. Once armed with this data, you will need to calculate the repair costs on your own (do you know how to do that?). Once you have all those numbers ready to go, apply this formula:

ARV (As-Repaired Value) minus profit minus cost of repairs minus all other costs and expenses equals offering price, which is equal to the as-is market value in the eyes of your likely buyer.

Who is the likely buyer? How do they purchase property? This is why you can use direct cost/profit to adjust from sales of properties in superior physical condition. Find sales of homes that look like your subject will when your client is done fixing it up and subtract from there. Here is a sample of an investors deal sheet:

Good luck and stop making appraisers look bad to the REI community.

 

[J Grant]

This is a private client that knows the condition of the properties. He rehabs and flips homes but wants an independent appraisal because he works with the banks on taking a short sale and most of the bank appraisers will not consider all the damage that has been done to the property. In fact, he had the banks appraisal that did not take into consideration the structural damage, just noted that there was a broken window and drywall damage in the laundry area with not cost for repair on those items, that the interior needed to be painted, the fence repaired and the trees trimmed for a grand total of $3,500, yet there is drywall damage throughout with broken tiles in laundry, kitchen and bath and it needs 17 piers on the foundation (he had it inspected). Somehow completely missed the dead rat in the dining room and the one in the attic.

Wow that is a huge difference between what the "bank appraiser" found and your client's inspection findings.
Have you seen the inspection report from your investor client? 17 piers in foundation is extremely expensive- I would want to see an engineer or qualified inspector's report if I were to base a value on it. The rest of what you describe is gross but cosmetic, a rat, broken tiles and drywall damage.

There is a vast difference between a run down house that is a candidate for remodeling to make a profit vs a true C 6 wreck with serious structural damage- it is in the investor buyer's interest to make the house look as bad as possible to get it at a very low price short sale. Of course if the house really is that bad, it deserves the low price , but if the house is "really" not that bad, he or you by the association of the appraisal could be construed as trying to defraud a bank by trying to get a property at a price far below what it is worth. Which is why I said you need to see the engineer or home inspector report about structural damage/piers needed ( and include it in appraisal as an exhibit).

 

[NachoPerito]

You should withdraw.

Your client knows what the property is worth by using C4/C3/C2 comps and you should too. If you don't, you don't understand how your market works. What is the intended use of the assignment here? This is not a mortgage appraisal. This is not for the bank or for a portfolio. This assignment is for purposes of price negotiation. None of the mortgage world BS applies. Your client wants your professional signature on the bottom of a piece of paper he is going to show the bank, in order to convince them of a lower selling price than their own appraiser came up with. You are charging them good money for this service and have a professional and legal obligation to perform the assignment competently.

Who are the likely buyers for a property like your subject? Rehabbers right? A traditional/typical buyer would run, so the property is not marketable to a typical buyer right? So that leaves rehabbers who are happy to buy it right? What do you know of rehabbers? Do they purchase property like a typical buyer? No they don't. So the question is, how does your likely buyer in fact purchase property?

I know you do not know the answer because of the question you asked in the first place, which is why I think you should withdraw. If you accepted the assignment at all, you should have disclosed to your client your lack of experience with the property type (distressed) and let them know how you would go about acquiring the necessary skills and knowledge to do the appraisal competently. In this case, you don't know what you don't know and now you have gone further than you should have. Shame on you. That said, most of us have made the same mistake in our careers along the way too and for that reason, I am going to give you the answer you need. However, don't ever accept an assignment you are not familiar with again. If you simply want to run at this point, then you can tell your client there are no comps and therefore you cant develop a credible appraisal - you could save face that way and would not be lying either.

Or, if you want to go through with it, you can use the typical rehabber formula to calculate adjustments. This will require that you know a few things from your client. You need to know exactly what they intend to repair and what they will not repair, what their expected/needed profit will be, what their holding costs will be, what the sale/closing costs will be - both at purchase and at resale, and finally what their loan costs (if any) will be. Once armed with this data, you will need to calculate the repair costs on your own (do you know how to do that?). Once you have all those numbers ready to go, apply this formula:

ARV (As-Repaired Value) minus profit minus cost of repairs minus all other costs and expenses equals offering price, which is equal to the as-is market value in the eyes of your likely buyer.

Who is the likely buyer? How do they purchase property? This is why you can use direct cost/profit to adjust from sales of properties in superior physical condition. Find sales of homes that look like your subject will when your client is done fixing it up and subtract from there. Here is a sample of an investors deal sheet:

Good luck and stop making appraisers look bad to the REI community.

View attachment 33829

Wait a second. Isn't this a forum? How good is a forum if you can't ask questions. Nobody has all the answers.

If someone read all the posts on this forum of people sneering at each other that would be a prime example of appraisers looking bad. There is a lack of professionalism.

Despite that, you have a valid point that the typical buyer is someone who will remodel the home for their own user or to resell to someone else. Both have a cost to cure. Also, his chart is pretty good, don't forget about the soft costs and the profit required. Often buyers need all cash with properties like this so there aren't as many potential buyers out there.

It sounds like you have deferred maintenance at the very least so do a cost to cure those items. Structural deferred maintenance can be beyond our pay grade so be careful of that. The other items you can get from the Marshall & Swift Cost handbook or a bid from a contractor in the area. I usually try to find out if the buyer has got a bid to renovate the property.