How are Leaky Homes Valued?

 

The following Article is by Glenda Whitehead - a Register Valuer with Quotable Value 

 

To some people, leaky homes have no value. They wouldn't even consider buying one. To others, the value is intrinsic because it is already their home. And yet to others, a leaky home may represent an opportunity to make a profit.

How do we assess the market value of a home with un-resolved or un-quantified weather-tightness issues? Does such a property have a different value to an owner who is going to repair it themselves, versus a purchaser?

Let us start by considering what 'market value' actually is. The market value is, by definition, the amount a property would exchange for between a willing, well-informed buyer and a willing, well-informed vendor. The principal of market value also states that the situation is free of duress, such as financial stress or matrimonial circumstances. It does not however take into account any emotional stress the vendor may be under in a 'leaky home' scenario.

Often an existing owner will conduct remedial work themselves and will not expect to make a profit from the situation. In such cases the owner only sees the intrinsic value of their home and doesn't consider what the open market would pay for such a property. For many, the stigma attached to a leaky home means it won't even be considered for purchase.

Leaky homes do sell, and with various levels of unresolved issues. The cost to rectify each home can be quite disparate. Therefore, valuing leaky homes by lining them up against one-another is generally not a good approach.

However, I have valued a terrace house in a development where all the homes required similar levels of work (re-cladding). The process was being managed through the body corporate and the actual cost was known to each of the owners. There was also recent market evidence (sales) within the development reflecting the same circumstances as the property being valued. What we refer to as 'direct sales comparison' was possible and suitable on that occasion.

But how do we value a leaky home when there is no direct sales evidence?

This question cannot be answered until the likely cost of repair is known. That is, we must establish the building costs, associated Council costs, financing costs over the rebuild period, and all other costs associated with the rectification process. Building costs will often be provided to us by owners who have sought builder quotes after engineers have established the extent of the damage.

We must also allow for extra costs such as landscaping, which may be ruined during the rebuild process. Having these facts at hand, we can then start the valuation process.

The valuer begins by assessing the value of the property as if the home has been fixed and has no leaky issues. We also take into account what the material the home will be re-clad with, and any incidental upgrading work, or other alterations that will occur during the process. Examples include re-cladding with weatherboards, replacement of joinery, and re-aligned roof lines to ensure better water disbursement. Often during the upgrade process other components of the home will be upgraded or replaced out of necessity, these are also taken into consideration when assessing the market value 'as if complete'.

From this, we then start the cost deduction process. We deduct for Council costs, building costs, other site development work, the cost of financing the project over the planning and rebuild period, and finally but significantly, a profit and risk margin.

Why do we deduct for finance costs? Because we put ourselves in the position of a willing buyer, who will see finance as one of the costs they will incur in the process.

A profit and risk (P&R) margin is taken off because; why would a purchaser take on such a project if there was nothing in it for them? While the current owner may not want to make a profit but just want a sound and dry home, a prospective purchaser would know there are always risks attached to such work being done. If actual costs exceed those provided, it is the profit and risk margin that will be reduced. Some uncertainty typically remains around costs, so we include a contingency fund.

Ultimately, if the project is undertaken by a new owner, the P&R amount is their reward, or for the current owner undertaking the project themselves, it represents their salvaged equity on completion.

The bottom line of our assessment is what a willing, well informed market buyer should pay for that property, in order to cover the costs to rectify it, and obtain a reward (the profit and risk component) for taking on the task.

Example:

Indicated Value 'As if Complete' basis:

Land value

 

$

 

400,000

Value of improvements

$

290,000

Market value on Completion (excluding chattels)

$

690,000

Added value of chattels

$

10,000

Market value (including chattels) 'As if Complete'

$

700,000

Less costs to rectify

Estimated building costs, including labour, materials, architectural fees, Council fees

$

170,000

Estimated finance cost over rebuild/re-sale period, allow: (say 6-9 months at applicable interest rates eg 7%)

$

21,000

Profit & risk allowance (typically a percentage of 'as if complete'  value, 15-25%)

$

105,000

Indicated value 'As Is'

$

404,000

As the indicated value after deducting all likely costs is close to the assessed land value, we are of the opinion that the land value should be adopted as the present value.

"As is" Market Value adopt $400,000

The above example, in which the Market Value is equivalent to the land value, is from our experience, not uncommon in the Auckland market. The owner then needs to ask themselves whether they should rectify the existing dwelling, or demolish and start again. The latter would incur further costs associated with demolition. Such a decision would depend on the size of the existing home and how well it makes use of the space the site offers. For an existing owner, rectifying the existing building may be the only viable option.