Sales Comparison Grid & Cost to Cure

[TekJ42]

Good Afternoon -

I am working on a revision for a lender who will not accept a subject-to appraisal report (assignment condition). The subject's roof is in the middle of being replaced (tiles are stacked ready to be installed). I based the value opinion on the extraordinary assumption that the roof replacement was completed in a timely and professional manner in accordance with local customs and regulations. The lender asked me to revise the report because they won't accept an extraordinary assumption - it bases value on a future condition so they won't allow it.

They are insisting I put a cost to cure adjustment in the sales grid - which seems highly irregular. Adjustments in the sales comparison approach are supposed to be based on measurable / quantifiable differences in attributes. Adding cost items to the sales grid seems inappropriate.

Has anyone come across this issue? Is it acceptable practice to use cost derived adjustments in the sales comparison grid?

Thanks in advance for your help -

 

[Fernando]

I always ask owner if there's work being done on the property before I go see subject.
If roof was being done, I ask how soon it will be completed. If within a couple days, I'll wait until the work is done before I go there.
If it's a major work and takes longer, I contact lender the situation and wait for lender how I proceed in such a scenario.
It saves everyone time being proactive.

 

[Terrel L. Shields]

Cost to cure is real. So what they want is an "as is" value, right? So they want you to deduct the cost to cure from the value reported. So you should be able to get that cost from the owner, right? Use it. There is NOTHING that can PROVE there has to be an additional deduction for some mystical market reaction. You cannot measure that market reaction, only ASSUME it unless you find a house being sold in the midst of a roof repair- so it suffers the same problem as an "EA" would.

Since it is a given that the roof is under repair and you can determine the cost, just do it. There is nothing in the books to stop you

My (old) copy of "The Appraisal of Real Estate" explicitly states that QUANTITATIVE adjustments include
Paired sales
Statistical analysis
Graphic analysis
Trend analysis
COST RELATED ANALYSIS
Secondary data analysis

It goes on further to say that cost related analysis only has to be "reasonable and approximate market conditions"... And with the repair almost done, then it is obvious it is going to be fixed very soon not some extended period in the future that a buyer would be concerned with.

 

[TekJ42]

Revision #1 made this point just as you stated. Market participants would see the new tiles sitting on the roof waiting to be installed and either assume the repair would be completed or specifically stipulate its completion as a condition in a hypothetical purchase agreement. The lender didn't like this - they are basically demanding a cost based adjustment in the sales comparison grid.

There does not appear to be a measurable market reaction to an unfinished tile roof replacement - there is no data to support a market derived adjustment.

Have any of you used a cost based adjustment in the sales comparison grid?

The AMC says if we refuse they will have to re-order the appraisal and pay for it out of their own pocket.

Cost to cure is real. So what they want is an "as is" value, right? So they want you to deduct the cost to cure from the value reported. So you should be able to get that cost from the owner, right? Use it. There is NOTHING that can PROVE there has to be an additional deduction for some mystical market reaction. You cannot measure that market reaction, only ASSUME it unless you find a house being sold in the midst of a roof repair- so it suffers the same problem as an "EA" would.

Since it is a given that the roof is under repair and you can determine the cost, just do it. There is nothing in the books to stop you

My (old) copy of "The Appraisal of Real Estate" explicitly states that QUANTITATIVE adjustments include
Paired sales
Statistical analysis
Graphic analysis
Trend analysis
COST RELATED ANALYSIS
Secondary data analysis

It goes on further to say that cost related analysis only has to be "reasonable and approximate market conditions"... And with the repair almost done, then it is obvious it is going to be fixed very soon not some extended period in the future that a buyer would be concerned with.

 

[Mejappz]

I have a similar case where the borrower is renovating their kitchen. The kitchen has all the appliances, but no cabinets. The purpose of the appraisal is for a HELOC, so I assumed the Lender wanted me to appraise the property "as-is" and estimate the cost to cure. I confirmed this with the banker, who also instructed me to put the cost to cure in the addenda, as well as adjust the grid as T suggested. I think these adjustments are not very objective, but it is what it is.

 

[Mejappz]

Have any of you used a cost based adjustment in the sales comparison grid?

I typically don't but I have in the past.

 

[Terrel L. Shields]

Have any of you used a cost based adjustment in the sales comparison grid?

Sure. I use cost related adjustments a lot. But the question remains. WHO is the ultimate lender? If it is an in-house loan from a bank, then they are required to have an "AS IS" value by the regulators...even if it also has a proposed construction, etc. GSEs and FHA OTOH are regulated by their respective Selling Guide and 4000.1. So you need to know in the order WHAT KIND OF LENDER is it? The banks are under the Interagency Guidelines and specs of the various regulators (FDIC, OCC, etc) unless they are selling the note to the secondary market.

 

[nauthead]

Why not just go back when the roof is finished and provide an as is with no CTC?

 

[Surf Cat]

Well, let this be a lesson to you in dealing with AMC's. They most likely ordered it "as is". Once you returned to the office, before even touching your keyboard, you should have contacted the AMC stating that the roof was not finished. They would have put it on hold or instructed you to do a cost to cure. This would have saved you all that time in writing up an extraordinary assumption and checking the appraisal subject to completion.

As Terrel and Mejappz pointed out, you can do the cost to cure. Get the cost from the borrower, add a bit for entrepreneurial incentive and be on your way. Don't forget a cya disclaimer

"The estimated cost to cure to finish the roofing is $xx,zzz. This amount is reflected in both the cost and market approaches to value. The appraiser is not a general building contractor and therefore cannot guarantee the above stated cost estimates. Inspection by a licensed and qualified General roofing contractor can possibly provide accurate cost estimates. Should a subsequent inspection reveal more significant costs than estimated within the scope of this appraisal, the appraiser reserves the right to change the final estimate of Market value".

Oh, don't forget to add a comment in the addendum about this condition change and change your signature date. Because there's two appraisals out there now with different values.

 

[TekJ42]

Thanks for the feedback everyone. I've used cost to cure in the cost approach and listed cost to cure items in an addendum many times - never had a lender insist that these items be added to the sales grid. Also never had a lender refuse to allow an extraordinary assumption. Maybe just a bad lender - noted for future dealings.