I see descriptions in listings all the time to the effect of, “no value given for the pool”, “barn not included in sale” or “zero value given to the detached garage.” But is it really legitimate in the eyes of an appraiser to exclude a portion of the property because an agent, buyer or seller is not considering it in the purchase price? In short, no. Let’s consider FHA and conventional loans.
The “whole enchilada” of FHA: There is no such thing in the eyes of HUD or the FHA appraiser for giving “zero value” to any portion of the property – even if the contract says so. According to FHA guidelines, everything in the parcel lines must meet FHA minimum property standards. This means if you have a dilapidated barn, it might need some repairs or even removal. If you have an old pool, it should be in working order. If there is an unfinished addition, the appraiser cannot simply ignore it. Or if a covered patio poses a safety issue, it’s a red flag. FHA is really concerned with the “whole enchilada” so to speak and not just a portion of the property (the house). In short, if it’s located within the parcel lines, the FHA appraiser will consider it within the valuation and it MUST meet FHA minimum property requirements. Bottom line.
But it’s a conventional loan and the buyer and seller have agreed: It’s important to realize appraisers cannot ignore features of a property no matter what an agent, buyer or seller might agree upon. This is not evidence of anal appraisal standards or mean-spirited appraisers, but rather something normative and necessary for valuations. The appraiser’s job is to analyze all facets of a property and any impact it might have on value. Appraisers are not bound by the agreements of a buyer and seller – even if those agreements are understandable. For instance, to take it to an extreme, imagine if a buyer and seller said, “the house is excluded from value”. Would the appraiser then only give value for the lot? Even if the house was a complete tear-down, the cost to demo might have to be considered and applied to the valuation.
Maybe the appraiser will conclude little to no real value is given for the feature excluded by the buyer and seller. But the appraiser definitely still has to at least consider the issues at hand and make that call after analyzing the market.
I hope this was helpful.
Any questions, scenarios or stories to share?
If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook
Ryan, I would swear that this was not the case some years back. I remember selling homes with rickety old sheds on the parcel and they were ignored as far as repairs go. Or barns. I’ve sold a lot of homes in the Rio Linda/Elverta area with a huge variety of “stuff” (structures that were per contract considered ‘no value’) on the property. Was this rule not really enforced in the past? Just curious. I started in this business in 2000 and I think for the first 3 or 4 years this was common. Then we had sub prime loans so didn’t have to worry so much about FHA guidelines – they were all conventional loans. Look where that got us! I learn a lot from your articles. Keep ’em coming! Thanks! Lori
Lori, you bring up a perfect example in selling properties in Rio Linda and Elverta. There is very often “stuff” all over the place, so a contract might say this “stuff” is excluded from value. But at the end of the day the appraiser listens to the market and analyzes what is there – regardless of what the agent, buyer and seller have agreed upon. The contract does not establish market value or rules for the appraiser after all. I see “no value” statements all the time in contracts, but that doesn’t mean there is no value. Maybe. Maybe not. I still need to analyze it and disclose what is there. That’s the main gist here. Sometimes I get the impression from real estate professionals that appraisers are supposed to not consider certain portions of a property because the parties in the transaction have stated they don’t have any value. Well, humbly put, part of the appraiser’s job is to determine what contributes to value and what does not.
And yes, back in the “glory days” of the market it was normative for things to be ignored by appraisers that shouldn’t have been ignored. Regarding FHA, I’ve spoken directly with HUD on the “whole enchilada” issue I’ve presented. That’s how they see it, so it’s hard to argue against that. Now whether those standards will be applied by every appraiser is another thing… Anyone can and should call 800-CALL-FHA to ask FHA directly about FHA standards.
This conversation underscores how differently agents and appraisers approach value too, huh. That’s one of the main take-aways for me.
Imagine the following “no value” scenarios. These are examples off the top of my head for situations appraisers really should consider even if the contract said there was to be “no value”. Maybe some are over-the-top, but I think they help illustrate the point that agreements of “no value” in contracts don’t drive value.
– “No value is given to the Corvette (or golf cart) left in the garage for the buyer by the seller.” Really? Might a Corvette donated by the seller be a concession and influence the price a buyer was willing to pay? Maybe. The appraiser should at least consider it.
– “The toxic dump on the rear portion of the site is given ‘no value’ by the seller and buyer.” Really? 🙂
– “The manufactured home in the rear yard is given ‘zero value’.” Yet it rents for $500 per month. Assuming it was permitted, would it really have no value?
– “The unfinished second story is given ‘no value’.” Is that the way the market sees it? Would most buyers be unphased by the unfinished nature of an addition that might cost $30,000 to complete? Or could it maybe potentially have a negative impact on value in light of the cost to finish the project?
– “The enclosed patio is given ‘zero value’.” How are buyers reacting to the enclosed patio though? Is it a positive, negative or neutral? That’s an important question.
I’d love to hear from anyone reading. Feel free to comment, share stories or ask questions.
The negative value issue went through my mind while reading this Ryan. If it is necessary to spend money to correct a situation that probably is going to be a negative value. Such as the case with the pool. Most people would not leave a dilapidated pool “as is” due to safety issues so at least the buyer is going to be looking at how much it will cost to do this. If he has to pay $10000 to fix it I’m sure that will be factored into his negotiations.
Excellent point, Tom. A negative issue might be technically “as is”, but there will be a discount to the price because it does affect value. The cost to remove or remedy is not cheap in some cases too. Thanks for your insight, my friend.
“barn not included in sale” Barn goes with the seller? LOL @ stupid MLS comments!
I valuated a Roseville home with a converted barn yesterday. It’s either a very nice place for a lawnmower, or a really cruddy 2bed/1bath guest house and I had to pick one. I valued it as a “super-adequate” place to put the lawnmower.
Funny, Anne. The barn usually does stay doesn’t it? I get what agents and sellers are saying though. It makes sense from a marketing and selling standpoint, but not from an appraiser’s point of view. I think that’s not understood sometimes. Sounds like an interesting property and very nice “lawn mower storage” unit.
Maybe I should have given the “tack-room with en suite bath” some value — after all, it did have a fancy popcorn ceiling… with glitter!
If it was yours to appraise or buy, would you give it value? Of course, the conversion is damaged and not permitted…’natch.
Gotta love popcorn texture. My house was built in the 50s. It had one room of popcorn texture leftover through the years when we bought it (not there anymore). It doesn’t like much of a value add. Maybe it would be appealing for storage as long as it’s structurally sound. If it’s a decent conversion and even without permits, maybe someone would use it for an office. But it sounds like it probably doesn’t have much market value in light of no permits and the quality of construction on top of that.
Thank you, Ryan – it’s good to know we agree about the value of a damaged Mother-In-Law barn.
I think it has potential but its is more of a money-pit than an asset, in its current condition.
Its tree house in front, otoh, was cool – I could see a kid applying pressure to their parents to buy that house because of it.
And, speaking of child-value, or whatever the term might be, I was inside a Doyle Ranch home in Roseville and I pointed out to my daughter, who was with me, that she could roller skate the entire first floor in one continuous loop, including through the kitchen and around it. She checked the floorplan and her eyes LIT UP! and I was thinking, I could totally sell this floorplan to children and get a couple families into a bid-war and see how much a parent will pay for the Roller Skating Rink House – I bet it would be a lot, if it were marketed right!
Another house, a former model house, was gorgeous in every way except the backyard had barely enough room to bounce a ball and the front yard had a steep slope. I showed the photos to my co-valuator, my 12yr old daughter, and she swooned over the house til I showed her the backyard. Her face fell. My daughter would be so mad if I bought it so I knew other parents would likely have the same experience. That plus it had six exterior doors. And it sold for a record low price, of course.
Next time I’ll comment on my BPO that its a “Kid-tested, mother-approved price!” 😉
It does sound like it has potential. I would see it as a potential office or a wood shop if it was big enough. 🙂 How interesting to hear about how your daughter sees things. While they may not know the fancy real estate terms to explain such concepts, they get it when something isn’t right. I inspected a house that sounds similar once. The house was donut-shaped and a pool was in the middle of the house (outside). It would be perfect for racing, roller skating or paintball…. well, and living. 🙂
It’s my opinion that being a parent, like you and me, gives us a deeper understanding of homes value and potential. We often see things differently than the people who don’t live with little ones see things.
The barn would be an awesome workshop – heated and cooled, 2 stories, built in 1960s, kitchenette and little bathroom…located on 2acres of level land in a conforming neighborhood…best school district in the Tri-County area, too. (And don’t forget about the little bulldozer moto-cross digger closing gift I’m gonna give you…)
What a great property. I’m sold. 🙂 Parenting sure does give us extra perspective. I’ll second that.