Jan 23, 2008

"Cost To Cure" Adjustment

Cost To Cure is an adjustment to the value, of the subject property, for the dollar amount it would cost to restore the property to its original construction state. Such in the case of a property referred to as a “Fixer-Upper” or a property with room "Additions".

In the market areas that AACAZ provides appraisal service for, there are many older homes, and it has been common over the years, for a property owners to construct an addition to the basic home. Such as an extra room on the back, or converting a garage/carport into an additional bedroom/den/family room/etc.

It has also been common for the property owner not to obtain a building permit for some types of additions.

When a permit is issued, the addition is inspected for building code compliance. The additional square footage is included in County Records for property tax purposes. And no adjustment in the grid is necessary. However, if no permit was issued, the square foot measurement of the addition should not be included in the GLA (Gross Livable Area) in the Appraisal Report.

By including the added square footage of the addition in the GLA, the appraiser is certifying the addition complies with and meets all local building codes, and is structurally safe and sound. By doing so, the appraiser can be held liable if anything should occur to indicate otherwise.

It is not uncommon for an Agent or a Homeowner to include the additional square footage when marketing the property. The added space or room provides an additional marketing feature used to entice potential buyers. Example: An original 3 bedroom, 2,000 square foot home, with a 156 square foot room addition (12 x 13 bedroom), can and usually is marketed as a 4 bedroom 2,150 square foot home. It is also a technique used to justify a higher listing price by comparing the 3 bedroom (now a 4 bedroom) to other 4 bedroom homes.

When appraising a property with additions, a comment should be made noting the type and quality of construction of the addition, and pictures of the inside and outside should be included in the report. This is when a "Cost to Cure" adjustment may be necessary.

If the addition does not involve original structure changes, such as roof, outside walls, weight bearing supports, etc., an adjustment could be made for the estimated cost to remove the addition by a common person. I would only make an adjustment up to $1,000.

If the addition involves structure changes (like the ones mentioned), I would not make an adjustment at all in the report. I would however, provide pictures and comments for the addition, plus an explanation of the reason no adjustment was made.

If the client, underwriter or reviewer requests an adjustment, or questions the report, then I would have the client hire a licensed contractor (since I am not a home inspector or building inspector) to provide a repair cost estimate to them. Then, when I receive a copy of the estimate from the client, I would include an adjustment for the amount of the estimate in the report.

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