Rehab Properties

Recently I had conversations with a relatively new real estate investor who was mystified at how an appraiser could derive a market value for a property that had been gutted.

The conversation led me to realize there may be several people, including appraisers who could be misled into believing an appraisal of such a property should be the “value as repaired” minus the cost to repair.

The reality is of course, that cost to repair does play an important part of the process, but the appraiser must also take into account the market reaction to the property, the holding time, the narrow market segment and specialty nature of the prospective purchasers.

When an appraisal is made of a home that is in pristine condition the base of prospective purchasers is open to normal market participants that are interested in the school district, distance to employment, and the like.

But when a property is in need to rehab, the typical prospective purchaser is an investor who is considering holding time, required expertise need to complete the repairs, and any market stigma attached to the needed repairs (e.g. fire damage, or extensive settlement).

Therefore the cost to repair, the holding time and stigma must be taken into consideration when a rehab property is appraised. The absolute best way to reflect the market reaction to such a property is to find sales of other properties that required rehab, track the purchase price, the price of repair, and holding time, marketing time and final sales price (upon completion of the repairs).

Unfortunately, from having reviewed literally 1,000’s of REO Rehab appraisals, I can tell you very few appraisals actually show this type of research or analysis. A few appraisals will present other REO sales and try to address similar (as is) condition. But few actually address the process or the motivations of the prospective purchasers.

3 thoughts on “Rehab Properties

  1. How would you know that a prospective purchaser could possibly be an investor? Aren’t there purchasers who would buy a house for themselves but decide to fix it up themselves? How do you handle a property gutted by fire, verses one that just has a lot of deferred maintenance (i.e. repairs/rehab)?

    1. Kathleen that is a good question. Appraisers analyze prospective purchasers by taking note of the type of purchaser who is typical for a particular property type. Generally speaking within the market areas that I have served, the typical prospective purchaser for a property needing major rehab is an investor. This of course does not mean that other types of purchasers may or may not by a rehab, it simply gives the appraiser a bench mark to consider when establishing the anticipated market reaction to the property type.

    2. Regarding your question of how to handle a property that is gutted by fire, the best way that I know to handle this is with market evidence. The best way to establish market evidence is to find other properties that have suffered from the same problems (i.e. fire damage to fire damage) and then track that the property. What did it sell for? How much did it take to repair it? How long was it marketed after repair? What was the after repaired sale price? You may be wondering how would someone find a home that had been damaged by a fire. In my market area, the fire department has a record of fire damaged properties. Often times you have to analyze properties from competing markets to establish the market reaction and then utilize this data to demonstrate your opinion for the subject. Hope this helps!

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