Problem properties

Knowing what to do–and what not to do–when a property has a detrimental condition can mean the difference between a closed transaction and a court date.

by Marty Kramer   There are hundreds of detrimental property conditions that can throw a real estate transaction off track. Circumstances like drainage problems, crimes that occurred on the premises, the presence of asbestos or lead-based paint, sex offenders in the neighborhood, offensive odors around the property, nearby power lines, or the existence of termite damage can cause seller anxiety and buyer doubt. How these kinds of factors impact a particular situation depends on a number of variables, including the nature and degree of the problem, market factors, buyer and seller motivations, and how all the parties act and interact.

What’s an agent to do?

You’re walking through a house and see black spots on the ceiling or notice a sloping floor. You know from experience these are red flags. This is no time to overreact, though. "You can’t necessarily go by what you see," says Rudy R. Robinson III, president of Austin Valuation Consultants, a company that appraises contaminated and other challenging properties. He advises that when you notice something that’s suspect, rather than jump to conclusions, you should further investigate the situation. A logical first step is to hire a specialist to do a limited assessment to see if there is indeed a problem. "It’s going to be very difficult to market a property where you don’t have a risk assessment of how bad is bad," says Robinson. "It’s a disadvantage to your seller. If no one’s done an assessment, it’s going to sell for a big discount."

While you shouldn’t overreact, neither should you downplay a potential problem or brush it aside entirely. "A lot of brokers bury their heads in the sand," says Randall Bell, a California-based appraiser and broker whose firm, Bell Anderson & Sanders, specializes in measuring the economic impact of detrimental conditions on real estate values. "When they hide the problems, they create a tremendous amount of business for attorneys and people like me," he says. Like Robinson, Bell recommends that the first thing an agent, buyer, or seller do when suspecting a problem is to call in the appropriate experts to assess the situation and try to quantify the risks for the parties. When agents jump ahead of this step and render opinions, they may increase the risk that someone will try to hold them liable for any problems that occur later.

Some agents and brokers, though, rely on their experience and an initial evaluation to make an early decision about their own involvement with a property. "If I see a potential mold problem that looks fairly large, I don’t want that listing," says Avis Wukasch, team leader for Keller Williams Realty in Williamson County. Wukasch, who chaired the TAR Risk Reduction Committee in 2001, feels that the lack of standards and regulations for mold problems creates too much potential liability. She points out that until the Legislature makes changes, even a property that has been remediated may be difficult to insure. Wukasch thinks listing agents are better off spending their time on listings they can sell with fewer hassles.

Agents are under no obligation to take a listing on a house that they suspect may be difficult to sell. TAR Director of Legal Affairs Ron Walker points out that people with mold in their home are not a protected class. "Of course, when making these decisions, you do have to make sure you treat prospects fairly and don’t discriminate against any class protected by fair-housing laws," he says. Walker adds that there are many scenarios an agent may face when deciding whether to take a listing that may pose a high risk, and there are no clear-cut answers.

None of this means that agents should accept only problem-free listings. An approach like that could severely limit your business. Wukasch points to foundation problems as an area where there are licensed professionals who can make determinations and perform repairs to certain standards. "If you have a seller willing to pay for all that, I’ll take that listing all day long," she says. A recently repaired foundation may even be a selling point for a house in a neighborhood where foundation problems are common.

Fix it or lower the price?

When a property does have a problem, a seller often is faced with deciding whether to make repairs before putting it on the market. An owner may decide to sell first because of time or financial constraints, but that sale will typically include a discount on top of the amount needed for remediation. Robinson refers to this discount as a profit incentive for the buyer to deal with the repairs and take on any other associated risks.

Occasionally, the remediation is insignificant to the overall transaction. Bell cites the example of a $100 million commercial property with an underground storage tank. Removal of the tank may be considered so minor compared to the overall value that it doesn’t figure into negotiations. That may also be the case for a property being purchased only for the value of the land with no consideration given to a building with problems.

Robinson has performed case studies on homes with mold problems that provide some insight about whether to remedy a situation up front. He found that purchasers who buy a property that hasn’t been remediated are going to want discounts of 25%-40% plus the remediation costs, while homes that were remediated and re-inspected before being marketed sold for a discount of between zero and 3%.

Situations you cannot "fix"

Some problems are not conditions one could uncover by even the most thorough physical inspection of the property. Such is the case with deaths and other crimes that occurred on the property, and the presence of sexual offenders in the neighborhood.

The Texas Property Code provides that "a seller or seller’s agent shall have no duty to make a disclosure or release information related to whether a death by natural causes, suicide, or accident unrelated to the condition of the property occurred on the property." Walker says that murders are not covered by this rule. "A murder on the property might be considered a material fact by a buyer, but the law is not expressly clear that a murder on the property must be disclosed or not. A court might evaluate a number of factors, including the date of the murder, any stigma that may attach, the notoriousness of the murder, and the foreseeability of a similar event occurring again. Since the law is not clear, it’s probably most prudent for sellers to disclose this fact," he says.

Wukasch believes all deaths–even those that occurred from natural causes decades ago–should be disclosed. If the seller won’t disclose it, Wukasch does not take the listing. "Crime is a very personal issue with people," she says. "One of the neighbors will tell them about it, and the buyers are going to see a lawyer, and your name is going to be mentioned in an unkind way," she says.

The presence of a registered sexual offender near the property may also deter some buyers from purchasing a property. Neither agents nor property owners have a legal duty to disclose information they know about registered sex offenders. As with crimes on the property, though, the buyers will likely find out, and disclosing what you know may head off future problems. For information purposes, TAR’s Seller’s Disclosure Notice informs buyers about the DPS sex-offender database should they want to view it.

Bell notes that when you look at the databases, virtually every neighborhood and community has registered sex offenders. Because of that, he says, he has not seen many situations where the presence of a registered sex offender has decreased property values long-term.

Crimes are a different story. Bell, who has appraised several properties that were sites of much-publicized murders, says there is usually a diminution in value that can take many years to fade away. Renting out the property before trying to sell it and making cosmetic changes can help take the stigma away.

The challenge of establishing the value

Determining the value of a property with problems is important to all involved. Assessments and repair estimates from engineers, geologists, and other experts provide a starting point, but an appraiser trained to evaluate properties with detrimental conditions is best equipped to consider all factors and arrive at the property’s worth.

When asked if most appraisers are capable of providing that service, both Bell and Robinson quickly answer no. "A lot of people don’t realize that a typical appraisal will have assumptions and limiting conditions that exclude any consideration of environmental issues," says Bell. "If the property does have environmental issues, they have not been taken into account into that value. The value in that appraisal may have nothing to do with the real value of the property."

Robinson says that to evaluate a problem property, he may have to study thousands of pages of documents, obtain additional expert opinions, and make comparisons to other properties. Because it is much more involved, you should expect to pay more for this type of analysis.

Bell makes a distinction between an appraisal and an environmental valuation. An environmental evaluation covers nine criteria, including environmental-agency research and analyses of remediation and impact on use. A typical appraisal covers only two of those nine criteria, relying heavily on comparable market data.

Bell doesn’t go as far as recommending environmental valuations on all residential transactions, but he does think all appraisers should be aware of the potential problems. There are many government databases and other compilations of information detailing where existing conditions may affect properties. That information, combined with observations at a property, can help an appraiser determine when an environmental valuation is necessary.

There is currently no designation or certificate course that will help you identify who is qualified in this area. Bell recommends checking with the Appraisal Institute (AppraisalInstitute.org, 312/335-4100) to find an appraiser in your area with advanced training on the subject.

"I would do my homework on who to hire," agrees Robinson. He suggests that you can find good appraisers and other experts to assess specific problems by asking for names from agents who have dealt with similar problems on other properties. "You hope to get the same name over and over," he says.

Information (and time) can change perceptions

With many types of environmental problems, perceived risks lessen as more information becomes known through scientific study. As experts and the public learn more about a subject, this can reduce the stigma attached to a property due to a specific condition. Bell thinks that will happen with mold, which he says is "riddled with a lot of junk science." He thinks that while there are cases where it’s a concern, those are the exception rather than the rule. "My prediction is that this hype will go the same direction as other environmental contamination issues and will really settle down," he says.

Whatever kind of problem you come across with a property, an objective, open approach that relies on experts will help you guide buyers and sellers toward their goals while minimizing trouble for everyone involved.

Photos © PhotoDisc and Rubberball Productions.

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