As Quoted in Yahoo Finance
An adverse public perception regarding a property; the identification of a property with a condition (e.g., environmental contamination, a grisly crime) that extracts a penalty on the marketability of the property and may also result in a diminution in value.
Bailey Valuation and Consulting, LLC has significant experience appraising stigmatized property. We have participated in the appraisal of over a hundred properties, both residential and commercial, that were involved in litigation with some type of alleged stigma.
The appraisal of properties with stigma requires specialized knowledge and methodology. Two types of clients often need help with stigmatized properties:
Under Arizona law, a buyer and seller of commercial real estate have legal duties to each other arising out of their contractual relationship, including the duty to disclose facts that are material to the transaction. If a seller knows that material facts affecting the value of the property are unknown to the buyer, the seller has a legal duty to disclose such facts, regardless of whether or not the buyer inquired into the subject. According to Arizona law, a matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.
Every year, hundreds of stigmatized properties are sold in Arizona without disclosure of a possible source of stigma. The most common way is when a bank or lender who sells the stigmatized property in “As-Is” condition. If the source of stigma isn’t disclosed to a potential buyer and that buyer doesn’t discover the condition on their own, the buyer cannot account for stigma in their purchase price.
The amount and type of disclosure must be considered for the subject property and for the support properties used to gauge the level of stigma. Without setting the level of disclosure in the appraisal report, any estimation of stigma damages is unsupported.
2. What is Betterment or Worsenment and how do they affect the appraisal when considering stigma?
Typically, appraisals considering stigma are written under multiple scenarios. These usually include two scenarios:
Many times when this work is performed, there is a certain amount of economic contribution associated with the repairs that make the improvements better than they would have been. This is known as “betterment.” For example, a 20-year old property floods and the owner makes repairs to restore the property and to mitigate future flooding. During the repair process, new drywall, kitchen cabinets, electrical wiring, and flooring is installed. In this case, the property has not only been restored, but effectively remodeled. Many appraisals omit this detail and do not account for the betterment of the property in the “As-If Repaired” scenario.
In other cases, the repairs or modifications to the property to mitigate future flooding actually make the property less marketable. For example, a property has a detached garage with a separate driveway and street entrance. To mitigate possible flooding, the owners build a wall around the property, effectively cutting off the detached garage from its street access. The garage is now only accessed by a maze of turns from the primary driveway. In this case, the property experiences “worsenment” by removing desirable features to mitigate the detrimental condition.
Betterment or Worsenment are often left out of appraisals that consider stigma. If overlooked and unaccounted for, any estimate of a diminution in value due to stigma are inaccurate.
These are only two of the many factors that must be considered when preparing appraisal reports on stigma. If you have any questions or need a complete and quality appraisal of a stigmatized property, we can help. Call Bailey Valuation and Consulting, LLC and tell us about your stigmatized property.