Ask Henry

As-Is Appraisal with Cost to Cure

Dear H2,

Is it acceptable to complete a URAR form 1004 "As-is" and also give a cost to cure? I appraised a house that had water stains on the ceilings and walls due to a prior roof leak which has been repaired. I gave a cost to cure of $8,000 to replace the damaged drywall and have the walls and ceiling repaired and replastered. But I did not call for this to be a condition of the appraisal; it was merely a "heads up" to the lender that there were water stains, etc. My exact wording was as follows:

"The subject property was in good exterior physical condition; the subject's roof is 5 years old and had leaked onto some of the interior 2nd floor walls prior to replacement according to family members of the owner. As a result the interior walls show signs of old water staining, peeling paint, and cracks in plaster (see photos). This is seen as cosmetic deferred maintenance in nature; repair is not called for, but the cost to cure is estimated at $8,000."

Is this proper or is it a conflict of statements?

Al Benjamin

Dear Al,

As long as your appraisal is clearly the value of the property in "as is" condition, there should be no problem. The problem occurs when it is implied in the wording somewhere that the value of the property when cured is the "as is" value plus the cost to cure. The cost to cure and the increased value of what is "cured" are not directly related. The market may recognize only a fraction of the cost to cure in a subsequent purchase -- or none at all.


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

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.