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Burned Up Property Value

Hello Henry,

We have an REO assignment for a four-plex in Bakersfield, CA. The units are located in an older area with fair/poor quality properties and predominately REOs.

The front unit is burned and boarded and needs to be rebuilt. All units are 2/1 and 880 sf; Rents range from $550 to $650; Similar sales are selling at prices ranging from 90K to 135K. We figure the cost-to-rebuild the burned out unit at approximately 70K (at a minimum). The remaining 3 units have been trashed and each will need approximately $6,000 in repairs.

We're stuck!! Should we use the income approach (principle of anticipation) and the land / cost approach? The sales comparison approach is going to put the value estimate for this property below zero.

Do you have an expert opinion how to proceed? Thanks in advance for your help!

Christine Dawson-Koehn, Certified Appraiser
Bakersfield, CA

Dear Christine,

I am assuming that the definition of value to be used in the appraisal is the market value of the property in "as is" condition.

The first step of any appraisal is to determine what the highest and best use of the property is. If you decide the highest and best use of the property is to rebuild it, then you would estimate its value based on the assumption that it is rebuilt (using all the techniques you would normally use for this type of property) and then subtract from that value the cost to rebuild and repair, plus what a typical buyer would subtract for their efforts, cost to carry during the rehabilitation, and risk to during the rehabilitation.

If you conclude that the highest and best use is to demolish the improvements, rather than repair them, then the value of the site would be its value after the demolition, less the cost of the demolition, based on what a typical buyer would offer for such a property, after they subtract something for their efforts and their risks.

The real solution to your problem is to do a thorough and professional Highest and Best Use analysis. This requires you to consider all the potential uses of the site, once the existing improvements have been removed, versus the costs (and risks) associated with repairing, renovating and remodeling the existing damaged structure.