Unfinished remodeling

[V. Nightshade]

I am appraising a house with some recent remodeling. The master bath is plumbed, but not finished. An extravagant "outdoor kitchen" is structurally complete, with all the heating and other infrastructure, but again, not done. The house has plenty of other finished bathrooms, and outdoor kitchens are not required! My inclination is to comment on these unfinished improvements, but to make no adjustment. However, it occurs to me that I need to adjust functionally downward to remove the unfinished stuff, or to finish it up. Which should it be? (As an aside, lately I've been getting conditions on my appraisals at an alarmiing rate -- usually to comment on the affect on marketability of whatever I've mentioned in the report. No matter how hard I try to document my reasons, they still want more. I want to try to underwriter proof my reports, and I am anticipating that this situation will trigger some kind of request. I want to avoid it!) )

 

[Terrel L. Shields]

First, What is Scope of Work? "As is" or "subject to repairs"

In either case, the cost to cure can be estimated. You need numbers....i.e- approx. dimensions of the work to be done. I use a National Building Renovation and Remodeling book with a CD. You can do the cost to cure....good as any method I know. And you can put in a item not in the report (see last line) when you have outside estimate or do it yourself.

 

[hastalavista]

I am appraising a house with some recent remodeling. The master bath is plumbed, but not finished. An extravagant "outdoor kitchen" is structurally complete, with all the heating and other infrastructure, but again, not done. The house has plenty of other finished bathrooms, and outdoor kitchens are not required! My inclination is to comment on these unfinished improvements, but to make no adjustment.

(my bold)

If you follow your inclination, what you are effectively saying is this:
All this stuff that isn't finished or is work-in-progress doesn't affect the sale price if the property were to sell; the typical buyer would pay the same for the house as-is vs. if there were no work-in-progress.

My experience is the above is true in certain situations: relatively small items may not affect the price. Or, in a rapidly increasing market where there are few homes and many buyers, then a buyer may pay full boat just to get the house (because there aren't many/any substitutes).

But other than the two situations above, I think a typical buyer would discount the price of a house if they have to walk into the middle of an incomplete project. Since they are probably not going to leave the project incomplete, they will have to finish it themselves or return the area to its pre-start condition. Either choice is going to require time and money to do.

If I were a lender, I'd want a pretty good (convincing) argument in the appraisal report that the subject's incomplete projects/work-in-progress doesn't warrant some adjustment or value consideration.

 

[V. Nightshade]

Thank you for your well-expressed and informative reply. I just wanted to comment on the result. I addressed the area in the report as discountable, deducted value, and appraised as is. I wrote: "The subject's unfinished master bath area is considered functionally inferior living area and is given a functional cost to cure adjustment for room completion" So I did give it a value consideration, but I also appraised it as is. The underwriter requested a 1004D for bath completion. However, the borrower hadn't planned on finishing everything up right away, and to me, that seemed perfectly rational. I explained this to the underwriter/lender-intermediary, and she indicated to me that it would have been better to not have gone into it if I didn't want the 1004D.

 

[hastalavista]

I explained this to the underwriter/lender-intermediary, and she indicated to me that it would have been better to not have gone into it if I didn't want the 1004D.

(my bold)

Maybe better for the UWs paper-pushing activity, but not better for you or, ultimately, the lender.

(I'm surprised at the UWs response? But, c'est la vie!) :new_smile-l:

 

[Mark K]

Depending on the quality and quantity of the improvements in progress and the extent of completion, it could be possible that the contributory value of the unfinished item(s) in place is equal to the estimated cost to complete, hence no adjustment is necessary.

A buyer might very well look at it in those terms, again depending on the amenity and the amount of effort and/or $$$ required to complete.

 

[V. Nightshade]

Very interesting point! The problem I had (and I think I may have confused things because of this), is that I chose not to include the space the bath count, but then used the cost to cure for finishing the room. Now that I think about this, I think I made a mistake. The cost approach would handle any analysis of functional depreciation, and it would take care of itself by being counted as GLA in the sales comparison approach, with disclosure that space has plumbing, and some missing light fixtures, but it otherwise finished.

 

[residentialguy]

The underwriter requested a 1004D for bath completion.

I don't understand this with lenders. You can have an unfinished area, but if you put a slab of drywall up, now you have to finish it.

 

[Flyfishnnut]

Another issue - did you look up the data online through the county to see if building permits were "pulled/paid for" for those improvements ? If they didn't take permits out - all that money/improvement isn't legal - and shouldn't be included - in fact, if anything, it would require a cost to cure for removal of the unfinished work.

 

[V. Nightshade]

Oh yes, it was so permitted that the assessor record included it in the bath count. And actually, as an aside, unpermitted work sometimes falls into a grey area -- illegal might be too strong a word So all permits are on line in Oregon? Not here (hit or miss, depends on city, and county permits definitely not online.