Properties with Problems

There are times when appraisers run across a property or properties that have multiple problems. When a property has functional issues, like a poor layout, that can be the basis for a downward value adjustment in a report. When you additionally have other negative factors like; significant depreciation due to physical age, electrical issues, plumbing issues, equipment problems like faulty HVAC units and locational issues you can be working on a property that has so many problems that market value can be significantly decreased.

Appraisers have to gauge the impact of each building problem. If your subject property is an office building that has almost a star-like shape with lots of corner areas that create dead or useless area, those areas are going to cause a loss in value. An appraiser has to determine how much area is lost to poor design and answer the question, “What is the net usable area of the building?”

If you are looking at something as simple as the fact that a large parking lot that must be resurfaced the cost to have it done can be substantial.  I have seen a number of commercial properties where the cost to resurface would exceeded $ 100,000.  It’s not often a cost that many new buyers are ready for and it’s one that many existing owners don’t want to deal with.

When there are a number of items of deferred maintenance items associated with a property it can become more difficult to market and sell it.  Buyers generally don’t want to purchase real properties that are in need of many repairs.  It takes time, effort and money to make repairs to a property and buyers discriminate against those properties that have problems.  Agents generally understand this and advise owners to “fix the problems” or suffer the consequences.  We all know what happens when the appraiser points to the issues and the home inspector identifies them.  Real estate transactions fall apart.

Most appraisers note in their appraisal reports that they “suggest a building inspection,” to identify problems that the appraiser wasn’t qualified to or didn’t see. There can be mold, infestation, settlement and items that appear minor may in fact be substantial.  There are times when the appropriate thing to do is have a contractor look at a property to make a cost-to-cure estimate. There are other times when an appraiser is comfortable making a cost estimate. If for example a property needs exterior painting and you as the appraiser know that it will cost about $ 2,000, because of past experience, you can state that approximate number without being concerned.  You have a basis in fact for the estimate.

If there are many problems associated with a real property its potential buyers may become concerned that even more problems exist and wonder if they just haven’t been identified.  It is likely that a buyer who sees obvious problems with a property will hire an expert to make sure that there are not more. Once a property transfers to a new owner it is much more difficult to recover money from a seller.

Hidden defects are a problem for both appraisers and property owners.  Some owners think that an appraisal “inspection,” which is only an observation, will identify all of the problems a property has when in fact it won’t.  Appraisers know that they are not looking at equipment, they are not looking at Radon and they are not looking for things like mold.  If they see problems they will mention them but again they will usually suggest a building inspection.  There are a number of things that a building inspector looks at closely that an appraiser simply does not, and it’s important that a buyer understand appraisal limitations.

Appraisers generally understand that problem properties should be discounted not only for the problems themselves, like the cost to fix or replace an air conditioner, but also for the fact that someone has to be paid to complete the work.  Only about half of the costs are associated with the equipment and the other half is going to be labor.  If you think about it there is also the cost of managing the fix or replacement.  Buyers have an aversion to dealing with building problems, that’s why they want a property (like a home) that is “move in ready” and not one that is a “fixer upper.”  The same psychology extends to commercial buildings only the cost of repairs can be far greater.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or http://www.horizonvillageappraisal.com, or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

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