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Sewer Backup Class Action Case

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mvpllc

Freshman Member
Joined
Apr 15, 2008
Professional Status
Certified General Appraiser
State
Missouri
I've been asked by an attorney handling a class action lawsuit that involves 9 homeowners in an area where the local municipal sewer utility has been found negligent in maintenance on certain lines causing periodic raw sewage backup into the 9 home's basements.
The court has ordered that the original appraisals, which relied on comparable sales data, were not acceptable and is requesting the value of loss of annual potential rental income be measured. Not the overall loss of what the subject property's value is. So my questions are these:
1) What type of report should I be doing and what would it be called? It's not an appraisal report, because I'm not valuing the properties, right? It's more like a rental market analysis...with a cost-to-cure section.
2) I considered doing an analysis of the cost of remediation, repair of the basement area, loss of tenant rent, vacancy if the backup caused a loss of the tenant's lease, commissions for re-rental, and stigma associated with a property that backs up every once in awhile, then subtracting those overall losses from the potential rental income if these instances weren't occurring. However, all of these properties are owner occupied, so I don't have a history of how past tenants would've reacted to this nuisance. Where could I find data on this?
3) I also considered showing the loss of potential income the property suffers from not having a finished basement. Because the property owner could never finish it, he/she suffers from a loss of a potential income stream that is precluded by the periodic backups.
4) I believe the property would suffer from some kind of stigma if this occurred somewhat regularly. I could see a tenant willing to rent the property, knowing this might happen, but at a reduced rate if they knew they're personal property would not be damaged and that it did not cause them harm. I'm wondering if any of you guys have data or can point me to a good source that I could use to figure the damage for this stigma. (The water level never got up above 1', all of the basements have 8' foundation walls)

I have informed the attorney that I don't have experience with this type of assignment but he said he still wants to use me because my testimony and appraisal in a case involving diminution in value was very helpful to that case.

Thanks for any help in advance
 

normando

Senior Member
Joined
May 2, 2009
Professional Status
Certified Residential Appraiser
State
California
I know of an area with water backup which caused major damage to some houses. There is one house down the block which has been on market for months. The area usually have good demand and I'm surprise it's still on market. May be the buyers' worry about future sewer problems. Then there was another house a block away which was pending. Last week it was back on market. May be worry about sewer problems. I don't know. It's a difficult. Good luck.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
My two-cents:
I've been asked by an attorney handling a class action lawsuit that involves 9 homeowners in an area where the local municipal sewer utility has been found negligent in maintenance on certain lines causing periodic raw sewage backup into the 9 home's basements.
The court has ordered that the original appraisals, which relied on comparable sales data, were not acceptable and is requesting the value of loss of annual potential rental income be measured. Not the overall loss of what the subject property's value is. So my questions are these:
1) What type of report should I be doing and what would it be called? It's not an appraisal report, because I'm not valuing the properties, right? It's more like a rental market analysis...with a cost-to-cure section.
I'd say if you have a specific subject and you are measuring a loss in value to that subject, you are doing an appraisal. Concluding market rents for a specific property is an appraisal.

2) I considered doing an analysis of the cost of remediation, repair of the basement area, loss of tenant rent, vacancy if the backup caused a loss of the tenant's lease, commissions for re-rental, and stigma associated with a property that backs up every once in awhile, then subtracting those overall losses from the potential rental income if these instances weren't occurring. However, all of these properties are owner occupied, so I don't have a history of how past tenants would've reacted to this nuisance. Where could I find data on this?
It seems to me that if the sewer is backed-up, the properties are unrentable, no? The reaction is 100% vacancy until the problem is resolved. Depending on the resolution, I doubt the stigma would last long for a rental scenario.

3) I also considered showing the loss of potential income the property suffers from not having a finished basement. Because the property owner could never finish it, he/she suffers from a loss of a potential income stream that is precluded by the periodic backups.
I don't think a home that has known sewer issues and, as a consequence, has its basement flooded with sewer waste water is rentable. I would think that there is a health and safety issue (since it is a known, recurring problem) that would have to be disclosed prior to renting the home. I doubt a landlord, well advised, is going to want to rent a property out with a known health/safety issue. From what you describe, it sounds to me like the property, as-is, until its issues are resolved, is not rentable. I think there are likely similar situations where the data exists to support this conclusion.
4) I believe the property would suffer from some kind of stigma if this occurred somewhat regularly. I could see a tenant willing to rent the property, knowing this might happen, but at a reduced rate if they knew they're personal property would not be damaged and that it did not cause them harm. I'm wondering if any of you guys have data or can point me to a good source that I could use to figure the damage for this stigma. (The water level never got up above 1', all of the basements have 8' foundation walls)
(my bold)
Your rental market must be much different than mine.

I have informed the attorney that I don't have experience with this type of assignment but he said he still wants to use me because my testimony and appraisal in a case involving diminution in value was very helpful to that case.

Thanks for any help in advance

I suggest, if you haven't already, you get a copy of Randy Bell's book, "Real Estate Damages: an analysis of detrimental conditions". Why it won't give you specific answers to your specific scenario, it will lay out a general process to go through so you can address the specifics of your scenario.

Good luck!
 

Michigan CG

Moderator
Staff member
Moderator
Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
It seems to me that if the sewer is backed-up, the properties are unrentable, no? The reaction is 100% vacancy until the problem is resolved.

I agree with this with an additional comment. Most rental properties are inspected by municipalities and landlords have to disclose to tenants potential issues. I doubt any municipality would give a permit for renting (depending on the municipality) until the problem is solved. The rent would be zero until the problem is fixed.
 

JTip

Elite Member
Joined
Oct 12, 2004
Professional Status
Certified Residential Appraiser
State
Pennsylvania
Water/Sewer Backup is typically a covered loss under a standard dwelling policy.

If nine homes are getting hit multiple times, I'm sure the insurance companies will subrogate again and again for negligence.
 

Doug Wegener

Senior Member
Joined
Apr 14, 2005
Professional Status
Certified Residential Appraiser
State
Oregon
I've been asked by an attorney handling a class action lawsuit that involves 9 homeowners in an area where the local municipal sewer utility has been found negligent in maintenance on certain lines causing periodic raw sewage backup into the 9 home's basements.
The court has ordered that the original appraisals, which relied on comparable sales data, were not acceptable and is requesting the value of loss of annual potential rental income be measured. Not the overall loss of what the subject property's value is. So my questions are these:
1) What type of report should I be doing and what would it be called? It's not an appraisal report, because I'm not valuing the properties, right? It's more like a rental market analysis...with a cost-to-cure section.
2) I considered doing an analysis of the cost of remediation, repair of the basement area, loss of tenant rent, vacancy if the backup caused a loss of the tenant's lease, commissions for re-rental, and stigma associated with a property that backs up every once in awhile, then subtracting those overall losses from the potential rental income if these instances weren't occurring. However, all of these properties are owner occupied, so I don't have a history of how past tenants would've reacted to this nuisance. Where could I find data on this?
3) I also considered showing the loss of potential income the property suffers from not having a finished basement. Because the property owner could never finish it, he/she suffers from a loss of a potential income stream that is precluded by the periodic backups.
4) I believe the property would suffer from some kind of stigma if this occurred somewhat regularly. I could see a tenant willing to rent the property, knowing this might happen, but at a reduced rate if they knew they're personal property would not be damaged and that it did not cause them harm. I'm wondering if any of you guys have data or can point me to a good source that I could use to figure the damage for this stigma. (The water level never got up above 1', all of the basements have 8' foundation walls)

I have informed the attorney that I don't have experience with this type of assignment but he said he still wants to use me because my testimony and appraisal in a case involving diminution in value was very helpful to that case.

Thanks for any help in advance

As some have noted, the properties are probably unrentable. Have any of them been rented out while this is occuring? I bet not. If they have,certainly the rents were below market.

I think it is really a simple assignment. Determine market rent of homes without sewage problem and that is the rental loss.Maybe survey a few property mangagement companies to get their opinion of whether a property with raw sewage in basement would rent or if they would accept it as a rental. Use the 1007 form with some additional narrative comments and collect a nice fee.

In fact, if there are eight houses they are probably not all the same and each would require a rent analysis often using the same comparables with some different adjustments. Good paying work there.
 
Last edited:

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Before and after appraisal. Same as a condemnation appraisal. And, yes, it is an appraisal. Get a condemnation appraiser to do it or help you do it.

Coming up with rent data sounds like a hair shirt job, especially in your non-disclosure state. Good luck, but personally I would run like the wind away from this one.
 

mvpllc

Freshman Member
Joined
Apr 15, 2008
Professional Status
Certified General Appraiser
State
Missouri
I agree with what you guys are saying, however, this case is moving under Missouri Constitution, Article I, Section 26's Inverse Condemnation. They are considering the backups as temporary damage. The courts have already ruled that the municipality is negligent. What we are doing now is trying to figure out damages. The law states that a public entity that temporarily damages private property rights is liable for diminution in value of the use of occupancy of the property for the period taken or damaged. This is usually equivalent to the rental value of the property for the time of the taking. In addition, to rental value, if the property has been damaged as a result of the taking, then damages are available to restore the property to its pre-taking condition.
So, my problem is the attorney I'm working with can't make the arguments that you have made. I have experience in condemnation and that is how I originally intended to tackle the problem. It seemed simple enough to me when he gave me the basics and asked me to do it, then I got into the specifics and realized what they wanted me to do.
I'm going to call around the P&Z departments and find out if they would issue occupancy permits for houses like this.
By the way, Dennis, I have Randy bell's book. There's some good info in there.
 
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mvpllc

Freshman Member
Joined
Apr 15, 2008
Professional Status
Certified General Appraiser
State
Missouri
I just talked to the permit issuing agency. They said, as long as the problem had been remediated, they would issue a re-occupancy permit, even if it occurred every year or so.
 
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