What is Stigma?
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.
Possible sources of stigma included
- Expansive soils
- Construction defects
The appraisal of properties with stigma requires specialized knowledge and methodology. Three types of clients often need help with stigmatized properties:
- Attorneys who need expert witness services
- Owners of a property that suffers from some type of stigma
- Builders, developers, or other professionals defending against a stigma claim.
If you are considering another appraiser, here are some questions to ask. They should be able to answer these questions and account for them in their appraisal.
1. How does disclosure at the time of sale impact the amount of stigma to the property?
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.
In any stigma appraisal assignment it is usually necessary to analyze three different instances of disclosure; 1. how would the current owner disclose the stigma issue to a potential buyer to meet their legal obligation in a hypothetical sale, 2. what was disclosed to the current owner of the property about the stigma issue, and 3. what type of disclosure was made to similarly impacted comparable sales used in the report.
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 Impairment and how do they affect the appraisal when considering stigma?
Typically, appraisals considering stigma are written under multiple scenarios. These usually include two scenarios:
- As If Unaffected: represents the property as though it was not affected by the detrimental condition or the cause of the stigma
- As If Repaired: represents the property after repairs or modifications have been made to mitigate the detrimental condition.
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 impairment by removing desirable features to mitigate the detrimental condition.
Betterment or Impairment are often left out of appraisals that consider stigma. If overlooked and unaccounted for, any estimate of a diminution in value due to stigma is 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.