cost to cure
by Jesse Lochman, State Certified Trainee
We are frequently asked to appraise properties that either have ongoing repairs, are not entirely finished, or have a significant and obvious deferred maintenance issue inconsistent with the condition of the rest of the structure. These types of properties present an obvious challenge to the appraiser, who must decide how a typical buyer would look at the property. Often times, especially in the case of rather small issues, a buyer will look at the property, determine a cost to fix, finish, or replace the item that is the problem, and deduct that amount from the price he or she is willing to pay for the property. Appraisers commonly mimic this method, calling it a “cost to cure.”
To illustrate, I recently appraised a home that was about twenty-years old and in good condition overall, except for the carpeting in three rooms, which was lightly colored and badly stained, and also holding pet odors.
I could have simply said that the home was in average condition and moved on, but that would have meant comparing the home to other homes in average condition rather than those in good condition, which would have been more accurate. So instead, I calculated the costs associated with replacing the carpeting (labor, disposal, new carpet and pad, etc.), and deducted that amount from the value indicated by the sales of good-condition homes.
Costs to cure are also useful for commercial and agricultural appraisals. For example, old buildings in desirable locations often sell where the highest and best use of the parcel is as a commercial building site. In this case, the appraiser will deduct the costs to demolish and responsibly dispose of the current building from the value of the land itself. In agricultural appraisals, if a field which is otherwise suitable for cropland has become covered with shrubby tree growth, the appraiser will do a cost to cure for removing the tree growth.
Cost to cure makes the appraiser think like the buyers and sellers of real estate. This is why it is the most accurate way to determine market value for many kinds of properties. But for the same reason, a cost to cure is not always the appropriate method, such as in situations where there are multiple problems with a home, or in a property type or market where buyers pay a premium for properties that are in perfect condition at the time of sale. But generally, the cost to cure can be a valuable tool for the appraiser when a property has issues of repair, maintenance, or incomplete construction. When properly applied, it produces results that are both credible and defendable.
Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.
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