We’ve touched on many issues over the past month relating to appraising after a disaster:
- Protecting yourselves at the time of the inspection,
- Recognizing the needs of the client which may be misunderstood (1004D versus a Catastrophic Disaster Inspection Report)
- Different forms for different assignments
- Sample questions being asked of appraisers
- Sources to use when detailing the cost estimate
- Sudden phenomena versus slow phenomena
- Fair Market Value versus Market Value
- Limitations of Competency
- Monitoring Recovery
This week I want to talk about the factor of mass displacement phenomena after a disaster. When Hurricane Katrina struck there were 1,200 lives lost and roughly 1 million persons that were displaced. The difference you have with Hurricane Harvey versus Hurricane Katrina is that although the lives lost were significantly lower (under 100 according to various reports from internet news services), the impact on the value of the properties is expected to be higher with Hurricane Harvey. As of September 26, 2017, there were still over 60,000 Texans displaced and living in shelters or hotel rooms paid for by FEMA. At the time of Katrina, Louisiana and Mississippi mortgagees had more lower down-payment mortgages so the walk-ways were naturally higher because approximately 20% of the borrowers had less than 10% equity in their houses. Comparatively speaking the incentive to stay will be higher in the Houston area the number of mortgagees having less than 10% equity in their houses is about 4%.
Based on these numbers what the appraisers can expect is various reactions dependent on the demographic trends of households that were insured. According to “Ben Graboske”, the senior vice president of data and analytics at Black Knight Financial Services, “It will come down to whatever individual person and their policy coverage included. That could be as low as about 25% of what a house replacement cost is.”
For the appraiser what you must face is the client’s need to know now; and, the lack of any data. There simply hasn’t been time for the data to be collected and analyzed by the “BIG DATA” analyst. What that means is that you will be held accountable for your opinion in terms of your forecast but your forecast will be based on an indeterminant timeframe. There is a scramble for construction, rehab labor and materials. There is still a scramble for inspections to be done.
With these uncertainties it’s imperative that you the appraiser have current cost manuals and/or services because the renovation and restoration costs estimates will be expected to be confirmed by you as you begin the before, after and forecasted value process.
If you use a cost service keep in mind there are some costs that will not generally be considered in the estimates. The costs will often be a base of beginning but you also need to consider the time the work can be done. That cost estimate will include finding qualified skilled labor, the impact of time on the costs of the materials, plus the cost of removing the water, preparing the site, the tear-down, chemical washing down and drying out of the affected areas as well as other required inspections. Please don’t bite off “more than you can chew”; detail what you saw, what needs to be remedied to restore the dwelling into a functional living quarter and recognize that when this work is done, the prior effective age will probably be less as much of the short-lived depreciation has been stopped and the short-lived items (which contribute significantly to a dwelling) will have changed. In some cases, homeowners will take this process and consider possibly redesigning their dwelling by removal of walls and creating the more open concept. They may add a bathroom, change the design flow of the kitchen. When you are at the point of doing appraisals for damaged properties you will need to ask the question(s) about how the property is planned to be rehabbed. Ask if any of these possible changes will be taking affect.
When it comes to a prospective value, the value after renovation, even if you appraised the property right before the disaster, may need to consider the high possibility there will be new sales that need to be identified. The effective age and the condition will in the future value at the time of restoration have a high probability of being changed. Make very clear what you the appraiser have understood the renovation to be and remind the client of your limitations as well as assumptions. Don’t forget that under USPAP, any type of specific assumption must be stated as well as a warning that the use of that assumption may affect the results of the analysis if the unknown or false condition is incorrect.