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Which Comp's Best ?

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Bob Stainbrook

Sophomore Member
Joined
Jan 3, 2003
Came across a problem the other day. Did a 80+ year old SFR 2 story 6/3/1 room count in a neighborhood that is coming back. Anything and everything from Fed. / State / Local grants, no interest loans, etc. are available. The city is buying up certain homes and bearing the cost to demolish. A guy buys one for $ 10k in the area ( not one to be razed ) and completely guts everything inside ( all wiring, plumbing, kitchen, bathroom, electrical, furnace, insulation, drywall, floor coverings, etc. ) down to the studs and out ( roof, vinyl siding, windows, porches, sofit, etc. ) is brand new and not fly by night materials or labor. Had an appraiser from out of town appraise @ $ 27k. The owner felt that wasn't right and had our company appraise. We valued at $ 37k. The comp's used were within a mile, but 50 - 60 years old due to the fact that their condition were closer to the subject. Last week another local appraiser went out for a local bank ( owner is having all of his rentals done for a blanket line of credit ) and said that they think the value should be around 20k. They said the comp's we used should not have been considered. Condition wise the ones they are talking about should not be even looked as comparable in effective age & condition. If we were to use these as comp's I feel I would have to make a condition adjustment so great that my net / gross adjustments would be off the chart, that and I was afraid when I hit the E&O botton on my software the screen may melt. The appraisal we did went through a desk review since we had never did an appraisal for my original client and never got a call for an addendum or additional comp's - nothing, just closed smooth and funded. The owner isn't madd at us, but can't understand how the two appraisals can be so off. It's not like the guy is trying to flip these. He had a deposit and 1 year lease @ $ 450.00 a month ( no utilities included ) justing waiting to move in. All his SFR are rented and he doesn't have a maintenance nightmare because all his homes are as maintenance free as humanly possible.
How would any off you handled this situation ? Are we really that far off ? Good or bad imput please.[/FONT]
 

Phil Rice

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
My first comment is that your post showed up in blue font and is hard on my eyes (end of rant).

Second comment: In my area, you could not buy a 1 car garage in bad condition for $50,000. Any 2 story house, even with fire major damage, would be well in excess of $100,000.

What I hear you saying is that you have a renal property that is atypical for the area, an appraisers nightmare. FWIW, I think you used the right comps -- and your value was OK. But I only know "your side" of the story.

The challenge in this situation is to document and explain in your report why you did what you did. Unfortunately, sometimes you have to spend a lot of time and effort discussing comps that you did not use, and why. Perhaps use 1 or 2 of the nearby comps as 4th and 5th comps, document and explain the condition/effective age/quality of construction issues, make your big adjustments.

The reader of your report may not agree with you, but they will at least understand what you did and why.
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
Did you include a fully developed income approach in your appraisal? Using other comparables with similar remodeling?

Not saying that would SOLVE the problem, but that might help support the value conclusion...particularly if you have in your file a series of long term rentals owned by the "major remodel dude".

I assume that you did go beyond just listening to this owners brags about the extent of work performed? Pictures, other remodeled homes etc?

Otherwise I think it is a case of 'difference of professional opinion' and your (hopefully) greater research into the difference between your subject and the immediately surrounding homes... with particular emphasis on the specific owners track record of MAJOR (instead of surfical) remodeling, is the reason for the value difference.

No way to win, just pray he keeps paying the mortgage, and none of the guy's properties go into default... on the other hand if they DID and your subject subsequently sold for 37K+ your problem is solved by proof!

I wouldn't worry. Either the lender will continue to use you or not: only time will tell who might have been right as unless the thing sold fast (tomorrow) the market in an area like that is a moving target anyway!

Gentrification or collapse... either generate work and it is to some extent random who has money in their pocket that determines value in such areas anyway!
 

Bob Stainbrook

Sophomore Member
Joined
Jan 3, 2003
Thanks Phil,

I hope this is better. I also changed the original post. Mercer County, PA located on the OH border. 75 miles NW of Pitts. / 75 miles SE of Cleveland, if you look at a state map Interstats 80 runs right through the county. the area is nice very little urban. The most expensive home that sold in the past 3 years for the county was $ 900k and that had 60 acres and an indoor riding stable. Majority of homes between 80k to 250k. Some new 2400' 4 bedroom in an upscale development are $ 220k. I just finished 6 of them. The city of Farrell has a range of $ 10k - 140k not any higher for SFR. I worked as a mortgage broker so I usually know what the UW's need to support my final value. Not that everything isn't USPAP to the tee ( although I don't think anyone really can explain it in layman's terms = it kinda of reminds me of our Appraisal Board Office in Harrisburg, you can call 10 different people on the same day and get 10 different answers to the same question ), but my verbage for unusual properties or the use up front with additional comp's on these type of properties usually get's the loan closed without the back & forth over the body of the appraisal. I do think that any trainee should have mandatory reading of this website. They should be able to log on and get CE credits just for reading. I have learned more in the past 5 months just reading than any class I have taken.
 

Bob Stainbrook

Sophomore Member
Joined
Jan 3, 2003
Lee Ann,
I researched some remodeled properties in the area, but the problem there is they are also rentals and I don't know if the interior was remodeled to the extent of my subject or the usual new vinyl siding, quick paint and new inexpensive floor covering to make it rental ready. The majority of the homes in this type of situation are not bought , remodeled then sold. They keep them as rentals for min 10+ years. The owners are better off with 25k - 28K invested ( 5k- 15k for the property + 10k - 15k in updating ) then rent for $ 450 - 550 per month vs. selling for 35 k - 40 k. Better tax ramifications. They like accumlating at least 10 - 30 at $ 6,000 per year on average per unit and in the property I appraised unless he doesn't screen tenants well ( which from the other properties he has owned for over 5 years ) they treat the homes like it's their own. As for the Income Approach. I used a conservative rent multiplier and it came in
@ $ 43,200. Thanks for your responce.
 

Charlotte Dixon

Senior Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Delaware
We just went through the same thing in our office. Our subject property was 80 years old and we used "new" construction comps, or 2-3 yr. old comps. Like yours, our subject was completely gutted down to the studs and everything was replaced. However, after the settlement, the investor called us jumping up and down saying NEVER, and he means, NEVER, has he seen new or newer dwellings compared to a completely rehabbed dwelling. ????? I don't know how else we could have handled it. We thought we did a good job; it settled. Now what? He never called back.
 

Phil Rice

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
I know these are very tough appraisal problems.

It is great if you can find 3 comps that are also rental properties and have been torn down to the studs and remodeled with good quality, and sold in the last 6 months.

In the real world, I am never that lucky. I never have the luxury of making a career out of 1 appraisal, I need to get them done in about 6 hours of total work.

I agree that it is very shaky to compare a remodel to new construction. A realistic approach is to use 1 comp new construction to establish the high bracket, one or two rental properties in good condition to establish the low bracket, use your best judgment and put the subject somewhere in the middle. If you have to make big condition adjustments, so be it. I include this line in just about every appraisal:

adjustments in excess of normal guidelines are indicated by the market

I have no other choice. I select the best available comps, and to get to the "right" value for the subject, I make big adjustments. I just have to do the best I can with the data that is available.

Income approach might do wonders. If the property would sell to an investor, think like an investor. If the property would sell as owner occupied, think like a homeowner. Perhaps lenders think this way: yes, the property is in fine shape now, but after 2 or 3 years of tenant abuse, the condition will be not so great. As an appraiser, you have to appraise what you see (on the date of inspection). I do not try to predict the future.

As long as you do a good job of explaining the situation, disclose the important info (photos of the subject go a long way, include 3 or 6 extra photos), and give your best honest opinion, you have done a good job (IMHO).
 

Bob Stainbrook

Sophomore Member
Joined
Jan 3, 2003
Interesting front page article in our local Heald paper today. HUD is constructing 25 new 2 & 3 bedroom homes in the exact neighborhood ( some on the same street ) where my subject is located. Cost per home averages $ 75k for 2 bedroom & 85k for 3 bedroom & NO BASEMENT. I hope my competition is appraising all these for HUD. I wonder where they'll get comps with effective age of 1-5 years in this neighborhood. I sure hope they don't go into the same area I had to get newer condition homes and use the 8 - 14k homes then make a 70k condition adjustment per unit. HUD will love those appraisals. :beer:
 

charlie hill

Sophomore Member
Joined
May 4, 2003
Professional Status
Certified Residential Appraiser
State
North Carolina
I agree that you probably should have relied more heavily on the income appraoch.

As far as age goes it is not really relevant in most older houses. Effective age is what tells the story. I have no problem what so ever comparing a 50 year old renovated house to a 20 year old orriginal condition if they are truely similar. I have never had it questioned by a reviewer either.

As far as raw age goes. If you have ever appraised any historic properties you know that sometimes positive adjustments for excess age are appropriate.
 
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