Ask Henry

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
appraisers@appraisalplus.org


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.

HSH
askhenryharrison@revmag.com

Book Review

253
Appraising Conservation and
Historic Preservation Easements


by Howard J Roddewig, MAI, CRE, FRICS
Soft Cover • 666 Pages •  $75.00

Publication Date: 2011
Appraisal Institute
550 W. Van Buren, St
Chicago, Il 60607

phone: 312 355-4140
www.appraisalinstitute.org

This is a big book. It is almost as big as The Appraisal of Real Estate 13th edition, which -- in just 742 pages -- covers the whole body of knowledge of real estate appraising. There seems to be a trend whereby the Appraisal Institute publishes highly specialized books on important appraisal topics without concern for how long they are. The purpose is to enrich the knowledge base of the profession, rather than to make a profit.
Read More...

Rave

Dear HH,

Been in this business since 1979 ... HH -- you have been there for us with forms (before computers), advice and the most intelligent outlook on the appraisal business, way better than any of the "suits" and "academics".  It's true that icons eventually move on, but never retire. This business needs you, HH -- more than ever!! Keep up the great work...

Carol Wolfe, SRA
Certified General Appraiser, Colorado
cbwolfe2000@comcast.net

Ask Henry

Coping with the UAD

Dear Mr. Harrison,
 
I recently purchased and received your excellent book on the UAD for the URAR.

I understand that the 2-4 form is not yet affected by the UAD, but I have not found a definitive statement anywhere regarding Condominiums or the 1073 form. One of my clients just asked me again, so I said, “Well, if anyone will know for sure, it will be Henry Harrison.”

So, I’m wondering what you know about condos being affected by the UAD. Since you didn’t write a UAD book for condos, I’m thinking they’re not affected, but I’d like to know for sure. I would appreciate hearing what you know on the subject. As an aside, it was your fine series of books that got me started 20 years ago and I was so happy to see that you are still in the business and going strong.

Best regards,
Michael Siegfried
HomeWest Appraisal
Homewest@socal.rr.com

Dear Michael,

Thank you for the kind words about my new UAD book, and my other books you've used during your appraisal career. Every author is delighted to have fans!

The UAD applies to the URAR, Individual Condo Unit Appraisal Report, Exterior-Only Inspection Individual Condominium Appraisal Report and the Exterior-Only Inspection Residential Appraisal Report.

You can verify this at www.efanniemae.com. It took me over three months to write the UAD-URAR book. The material that Fannie Mae made available to the computer programers was much more helpful than Appendix D which was designed for appraisers. I also had help from the software vendors who in turn had access to Fannie Mae when they ran into trouble.  I am thinking about doing Guides for the other forms but have not decided yet.

HSH
askhenryharrison@revmag.com

Announcement

Landy Insurance Company Partners with Navigators Management Co., Inc., to Expand Professional Liability Coverage

Landy Logo
The Navigators Group, Inc. (NADAQ: NAVG) has announced that its principal underwriting subsidiary, Navigators Management Company, Inc., is continuing to expand its Professional Liability capabilities by partnering with the Herbert H. Landy Insurance Agency to provide Errors & Omissions Insurance to Real Estate Agents, Brokers and Appraisers.These new programs are expected to be available on a nationwide basis, effective June 1, 2011.

“We’re very excited about the opportunity to work with Navigators,” states Betsy Magnuson, President of the Herbert H. Landy Insurance Agency. “Their Professional Liability team has extensive expertise in this class of business and this will provide us with a fresh perspective and enable us to bring innovative solutions to the marketplace. We anticipate that combining the strengths of our two organizations will be a win-win for our clients and trading partners throughout the country.” The new Real Estate Agents and Brokers and Real Estate Appraisers Errors & Omissions Programs will offer expanded coverage options, as well as higher limit capacity.
Read More...

Rave

Dear H2 & REV:

Great to know all is well. I have had you, Henry, as an instructor, and have read much of your work over my 35 years in appraising. It is amazing that at 80 years, you look so much younger. At 63, I have a desire to retire. And, you are very correct to say how quickly things are changing. I spend too much time trying to stay informed - and keep up - and don't seem to be able to do as much appraising these days. Have many happy family times, Henry! Thanks for all you do.

Charlie Weaver
Albuquerque, NM
cxw@usa.com

Article

House Committee Approves Flood Program Extension; Bill Goes To House Floor, from PropertyCasualty360.com

The House Financial Services Committee reported to the House floor legislation reauthorizing the National Flood Insurance Program for five years. The vote was unanimous. The bill is H.R. 1309, the Flood Insurance Reform Act of 2011.

A key component of the bill is a provision that, for the first time since the program was launched in the 1950s, opens the door for the private market to play a strong role in insuring against flood, primarily through reinsurance...

Industry and House leadership want the bill out the door promptly in order to give the Senate as much time as possible to deal with the issue before the current extension of the program runs out Sept. 30th. The program has been extended 10 times on a short-term basis since the original reauthorization ran out Sept. 30, 2008. The program lapsed for a total of 53 days last year because Congress was unable to pass short-term extensions on time.

Following a lengthy debate, the full committee decided to add business interruption insurance to the program. A subcommittee had passed a provision adding the coverage earlier, and the full committee rejected an amendment sponsored by Rep. Jeb Hensarling, R-Texas, that would have removed that provision... Read More...