Marion R. Johnson, CAE and Paul A. Welcome, CAE
and Darla Frank, CAE
In an issue of the Assessment Journal published in 2001 we examined the effects of
mold contamination on the fair market value of a single family residential
property in Johnson County, Kansas (Case
Study: The House of Mold, Assessment Journal, November/December 2001). Recently we revisited the property to see
what lasting affects, if any, the stigma of mold has had on the property’s fair
market value. In our original study we
looked at the loss in value from the standpoint of the cost to repair the
problem. However, these types of
stigmatized properties, even after being remediated, may take months or even
years to recover from a blighted image, if they ever recover.
The Uniform Standards of Professional Appraisal
Practice (USPAP) have addressed the issue in Advisory Opinion #9. The advisory opinion states “The value of
an interest in impacted or contaminated real estate may not be measurable
simply by deducting the remediation or compliance cost estimate from the
opinion of value as if the property is unaffected. Other factors may influence value, including any positive or
negative impact on marketability (stigma) and the possibility of change in the
highest and best use.”
Following is a brief history of the subject property
and the determination of the affect the mold contamination at that time.
The subject property, a two-story single family residential structure, located on approximately four acres of land, was built in 1998. The land was purchased in 1997 for approximately $85,000 and the actual cost to construct the improvements was $900,000, according to the property owner. The $900,000 included $715,000 for the two-story structure, $50,000 for a 20-foot-by-32-foot swimming pool and $50,000 for a fence around the entire property. The improvement is brick construction with 3,852 square feet of living space, five bedrooms, six full baths, a 728 square foot attached garage and a full unfinished walkout basement. It also has central air with two fireplaces. The structure was graded an A+.
In December of 2000 the subject property sold for $450,000 and the value of the structure after abstracting the land and pool value from the sale price was calculated to be $324,000. At the time of the sale, the mold problem still existed. The replacement cost new of the structure, without any mold damage, on January 1, 2001, according to the county’s cost tables, was $772,700. Using the 2000 sale price and the abstraction method to find depreciation, the accrued depreciation on the subject property was determined to be $448,700 or 58 percent.
At the time of the sale the effective age of the subject property was estimated to be three years and the total economic life of the property was sixty years. Using the age-life method to find accrued depreciation, the normal physical deterioration percentage for the subject property would have been five percent (3/ 60). Therefore, the indicated depreciation attributable to the mold problem was 53 percent (58 percent minus 5 percent).
The Mold House Revisited
In August of 2002 the mold house sold for the second time for $600,000. The mold problem had been remediated at the time of the second sale. Upon examining the sale, the question that we asked was: “Was the house’s fair market value affected in any way by the stigma of the previous mold problem?”
Stigma is “a perception that a property continues to be contaminated even though it has been cleaned up” (IAAO 1997). Stigma is intangible but may have an affect upon the subject property’s fair market value. “This creates a situation similar to obsolescence, because, if the market will pay less for a once contaminated, but now restored property, the value of the property has been diminished” (IAAO, 2001).
Another question that needs to be asked is “How can we measure loss in value due to stigma?” Some experts in the field of contamination note that stigma can be measured by comparing the amount of time a contaminated property stays on the market compared to the amount of time it typically takes to sell a non-contaminated comparable property.
Was Stigma a Factor in the Second Sale?
The subject property was listed on the market through the multiple listing service in April of 2001 for $1,141,000. In November of 2001 the listing price was reduced to $749,000. An offer on the property was made in December 2001 but the sale was never completed. The property finally sold in August of 2002 for $600,000. The subject property had been listed on the market for 16 months before it finally sold the second time. Typically properties in the $500,000 range and up in the subject properties’ area are on the market for five months or less. Based on this information it would appear that the subject property was affected by the stigma of the prior mold contamination.
One way, we decided, to try and measure the loss in value due to the stigma from the prior mold problem, was to compare the typical ratio of selling price to list price for other residential properties in the jurisdiction compared to the subject property’s selling price to list price ratio. In the jurisdiction, residential properties in this price range on the average sell for 90 percent of their original list price. The selling price/list price ratio for the subject property was 53 percent ($600,000 / $1,141,000). The difference in the two ratios is 59 percent (53% / 90%). At the time of the second sale it was estimated that the subject property has an effective age of three (3) years and economic life of 60 years. The amount of physical deterioration on the subject property was calculated at five (5) percent (3 / 60). Therefore, the amount of value loss due to stigma would be approximately 54 percent (59% – 5%) using this method.
This method is only reliable if the original list price for the subject property is a true representation of what the property should be worth without any mold contamination. As noted earlier the owner had purchased the property in December of 2000 for $450,000. The cost to repair the mold damage, based on two estimates, was approximately $700,000. With these two pieces of information it would appear that the original listing price of $1,141,000 was fairly representative of the market value on the subject property if there had been no mold contamination.
Loss in Fair Market Value Attributable to
the Stigma Based on Market Data?
During the mold remediation process approximately 1,200 square feet of finished basement living (fbla) area was added to the subject property. The estimated cost of the fbla using the county’s current cost table is $57,960 ($48.30 x 1,200). The RCNLD of the subject property after removing the fbla was $774,100.
Using the abstraction method, the replacement cost new less depreciation of the subject property’s structure based on the sale price was $361,560. The RCNLD was calculated as follows:
|
Sale Price |
$600,000 |
|
minus land value |
- 148,210 |
|
minus other bldg. value |
- 32,270 |
|
RCNLD |
$419,520 |
|
minus fbla cost |
- 57,960 |
|
RCNLD |
$361,560 |
Based on the RCNLD developed from the county’s cost system and the RCNLD developed from the marketplace the depreciation on the subject property is estimated at 47 percent ($361,560 / $774,100). This depreciation can be attributed to stigma caused by the prior mold contamination. In comparison, the amount of depreciation, attributable to the mold problem, calculated during the first analysis of the subject property in 2001 was 53 percent.
Based on our previous calculation of a 53 percent loss in value and the current calculation of 47 percent, it is estimated that the loss in value caused by the stigma of the mold is approximately 50 percent. The 50 percent number is also supported by the 54 percent loss in value when using the list price to sale price method.
Economic Obsolescence?
In our first analysis of the subject property in 2001 we determined the loss in value to be functional obsolescence curable. Functional obsolescence is defined as: “Loss in value of a property resulting from changes in tastes, preferences, technical innovations or market standards” (IAAO, 1997)
However, after an analysis of the second sale it would appear that the loss in value suffered by the subject property may be economic obsolescence and not functional. Economic obsolescence is defined as: “A loss in value as a result of impairment in utility and desirability caused by factors outside the property’s boundaries’ (IAAO, 1997). Even after the mold problem was remediated a loss in value was still present in the subject property. The stigma caused by the mold contamination had an apparent affect on potential buyers and is beyond the control of the property owner and therefore meets the definition of economic obsolescence.