Today I want to share a few things to know about appraisals after a house has burned down. This isn’t a very easy subject – especially for property owners looking for information after a recent fire. If that’s you, my heart goes out to you and I am sorry about your loss. I hope some of this information helps give a little more context for your situation. If you have any questions, feel free to ask.
Here are a few things to know about appraisals on burned houses. Yes, this is me inspecting a charred home in the Natomas area of Sacramento a few weeks ago.
Repaired Value: Usually the client is going to want the appraiser to do an appraisal as if the fire did not happen, or in other words give a “repaired value” instead of an “as is” value. In fancy terms, the appraiser will use a hypothetical condition to appraise the property, which means the appraiser considers something as fact for the sake of analysis even though it is not true. In this case the house is considered to be in whatever condition it was before the fire even though it is obviously damaged.
Inspection: The appraiser will likely do a physical inspection of the property as long as it safe to do so. Of course a client may also allow an exterior-only appraisal (aka “drive-by”) if that suits their needs. The appraiser can do whatever inspection is required so long as the appraiser can get enough information to render a credible value.
Hiring an Appraiser: The insurance company or a contractor will likely hire the appraiser. The property owner can of course find an appraiser too. I recommend connecting the appraiser with the insurance company to be sure the appraiser and insurance company are on the same page about methodology, timeline and pricing.
Property Research: The appraiser will be trying to understand what the house was like before the fire, so the appraiser will gather details about the house from a variety of sources like a physical inspection, Tax Records, the home owner, neighbors if need be, Google Maps, aerial views and old MLS listings. All or some of these sources can begin to piece together facts about the home and help the appraiser do an appraisal despite the damage.
The Fine Print of a FEMA Flood Zone: If you live in a FEMA flood hazard zone in the Sacramento area and your house has severe damage from a fire, it is important to know the fine print. Here’s how it works. Due to FEMA guidelines, you can improve a home up to 40% of the assessed structural value of the house or obtain an appraisal and get up to 50% of the market value of the structure. Note that I said value of the “structure” because an assessment is usually broken down between “improvements” and “land”. This means if your assessment is $200,000 with $160,000 of that assessment accounting for improvements (the structure) and $40,000 for land, you can only make $64,000 in repairs (that’s 40% of $160,000). That won’t go very far when there is significant damage, which unfortunately sometimes means home owners literally cannot repair their homes. However, you can also get an appraisal to try to capture a bit more value. An appraisal can work to your advantage when the assessment is really low (if you purchased a long time ago or bought several years ago before the market saw dramatic increases in value). The appraiser will do the valuation as if the house was NOT burned, and then 50% of the market value of the structure can be used for repairs. It would be great if 50% of the total market value of the house and land could be used, but it is only 50% of the market value of the structure (or in fancy terms, 50% of the depreciated “as is” cost of improvements). The market value of the existing structure is found by doing The Cost Approach in the appraisal, which basically considers the cost to build, amount of depreciation the house has (before the fire) and the value of the land.
Please let me know if you have any questions or if I can assist in any way with your situation.
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Quite an eye opener. I thought this was why we had fire insurance & rebuild would not be impacted & reduced to a percentage. So, in this case were you asked to appraise so that the insurance company could determine what percentage they would cover for the loss?
Thanks Gena. In this case I was asked to do an appraisal by a contractor (who is working with the insurance company and talking with City Hall). The insurance company could easily cover all the damage in light of the fire since the property owner was covered, BUT there are limitations to repairs because of FEMA flood hazard zone rules. As I mentioned above, a property in a FEMA flood hazard zone can be repaired up to 40% of the assessed value of the structure or 50% of the appraised market value of the structure (only the structure – not the land). The good news is I think it’s actually going to work out for this owner since the appraised value of the structure was higher than the assessed value. It’s just too bad that this rule exists because even 50% of the market value of the structure is not much if there is significant damage. The sad reality is that some property owners have literally not been able to rebuild because of FEMA rules (despite having fire insurance).
This is sad! But happy for this owner. Thanks for the clarification!
I know, Gena. It really is sad. I cannot imagine how frustrating it would be to be in that position too as a home owner. There has been some talk lately about the Army Corps of Engineers working on the levy so Natomas can be declassified as a flood zone. I hope this can happen soon (and that way new construction can resume in Natomas also).
One argument I would consider in the FEMA zone is that land has a very low value for the very same reason, unimproved, it has few uses. In fact, the county has some lot assessments on recent home sales as low as $20K….the number is a good mark. So that improves the mix for repairs.
That’s good to hear Jeff. I think the county should definitely be making them low. The house I recently appraised had a lot value of $40K, which seems high. This is a great example of why the Assessor needs to really get their land-to-structure values correct in Natomas. Thanks for bringing it up.
Hi Ryan,
Big fan of your appraisal and i stumbled on this as i am researching for an upcoming fire damage appraisal, effective date prior to the fire damage and with cost approach. Any good resources for fire damage appraisals? Do you typically put these on a GP form?
Thanks so much Garrett. I appreciate it. I put this on the GP, though in this case I believe I may have only used the Cost Approach section. If I was using three comps I would have no problem at all putting it on a GP form. Unless a client wanted me to use a Word doc or something I would stick with the GP form.
We had a total loss due to house fire last year. Now our home insurance and property value are incorrectly based on the previous home and not the newly built home on our lot. We are now in dispute with the bank and insurance about who is responsible for getting the new appraisal done and may have to retain a lawyer to get this resolved. Any advice about this?
Hi Joelle. I’m so sorry to hear about the fire. I’m grateful though to hear you were able to rebuild. In this case it’s hard to offer much of an opinion because this is an issue between you and your insurance / bank rather than an appraisal issue. I’m not certain who the burden for establishing value falls on if there is a discrepancy. I will say banks often require owners to get their own appraisals when removing PMI and such, so it wouldn’t surprise me if you had to get your own appraisal in other circumstances. The big question in my mind is who has the responsibility for establishing value for insurance purposes? Is it the insurance company or the owner? I’d defer to a lawyer or the law to correctly assess that. Sorry I couldn’t be more help.