cost to cure

[Norman]

Hi all -
I'm appraising a 4200+ sqft center hall colonial that was built in 2004. Owners started some major home renovations which included a finished basement with hardwood & marble flooring, along with tin ceiling, a spiral staircase that spans 3 floors/levels - basement, living rm (1st fl), master suite (2nd fl); retention wall with brick steps, and a stone & slate terrace with patio below. Unfortunately, due to a nasty divorce the property is now being sold "as is" (building materials of projects already purchased and are included in purchase price) and the before mentioned projects (basement, spiral staircase, terrace etc.) are only half-way done. The subject is currently functional, it appears the structure and foundation are sound and have not been jepordized. I'm having difficulty tackling this one! After talking to the realtor and then a local contractor I came up with a conservative "cost to cure" of $75,000 figure. I have sales in this market that will support the purchase price of $915,000 even with the "cost to cure" price of $75,000, but should I go the "COST to CURE" route? How do I do it? I have not done many and it's been some time since my last! Any suggestions? Is there another way to attack this assignment?



Thnank you!

[Gary F. Kristensen]

I would go the cost-to-cure route unless you have similar unfinished comps. Just make an across the board adjustment for your cost-to-cure to all comps and your other approaches to value. I think that the important (and difficult) factor to estimate is an entrepreneurial incentive. Myself or any investor that needs to spend $75k (in addition to the sales price) to cure will want some gain in equity or sale profit for my risk. This could be a large gain if your typical buyer is an investor or a small gain if your typical buyer is a do-it-yoursefer who intends to occupy the house. Risks include other costs that come up, declines in the market, or increased time to complete etc. You might be able to estimate the incentive by talking to people who have purchased other similar renovation projects in similar markets and market conditions. I hope that this helps. As with anything in appraisal, there is always another way to do it.

[Norman]

Gary, thanks so much for your assistance! In talking to another appraiser about my assignment, he suggested I avoid the "cost to cure" all together! He stated - this is not an FHA loan one, two - none of the unfinished projects impact or compromise the integrity of the structure or foundation. Just be sure to note that subject is being sold "as is" and make adjustments accordingly - i.e. if basement is unfinished or partially finished adjust for that. Base on the little info I've provided DO YOU AGREE?

Thanks again for your help!