Appraising Stigmatized Properties: The Challenges and Opportunities

appraising stigmatized propertiesWhen a lender places an order for a property, often times both you and the lender might not know the marketplace views the property as stigmatized. Once the specifics of the case are revealed, the assignment will call for a high level of expertise, knowledge, and research.

While this may be an opportunity to expand your horizons and enter into a niche market, be sure to evaluate the situation and qualifications needed to do the assignment. Consider aspects of the S.M.A.R.T business maxim before agreeing to take on the assignment: Specific, Measureable, Achievable, Realistic, and Timeline. If these pieces don’t fit well with the assignment, it may be wise to decline the job.

Definition of a stigmatized property

A stigmatized property is generally defined as one that buyers or tenants shun for reasons that are unrelated to its physical condition or features. Examples include the death of an occupant, murder, suicide, and/or a belief that a house is haunted. While the concept is controversial, it is the state that provides laws or guidelines which vary from jurisdiction to jurisdiction.

Types of stigmatized properties

Criminal: Illegal activity (e.g., drug dealing) took place on the premises, and there’s a worry that former visitors could return and try to engage in further illegal activity.

Murder/Suicide: A murder or suicide occurred on the property. Disclosure depends on state law. For example Maryland law does not require disclosure, whereas California law requires that this must be disclosed.

Debt: Debt collectors are unaware that a debtor has moved, resulting in harassment of the new owner, especially if the collection agency uses aggressive or illegal tactics.

Phenomena: The property is notorious for haunting, ghost sightings, etc.

Public: A public property that has a stigma known to a wide selection of the population, such as the Amityville Horror property.

Environmental: A contaminated property and/or property in close proximity to public or private facilities with hazardous materials carrying the potential for environmental problems.

Authorities investigate a mass murder in Amityville, N.Y., in 1974. (Photo Source: Richard Drew/AP)

Pros and cons of appraising stigmatized properties

Stigmatized properties represent a small part of the appraisal field. Having the Law of Scarcity in its favor, there is the potential for good income. However, appraising stigmatized properties requires extensive research. The time involved can be difficult to estimate. For example, it may appear that the research will entail four hours, but in reality, it may require eight. The “x” factor—time for research—depends upon the type of stigmatized property.

Often referred to as “distressed,” these properties involve legalities that vary state by state. As an appraiser, you are dependent upon state law as to the level of detail and exposure allowed. Some types of stigmatized properties must always be disclosed, some are determined by the jurisdiction, and occasionally it is left up to others (e.g., the seller or even the real estate agent). So, one size does not fit all. You must take into consideration the laws of the state in which you practice and determine whether or not to accept the assignment.

The Law of Supply and Demand is also a major consideration. A horrific crime is often considered a major deterrent by purchasers and (although psychological) can cause the property to be devalued by the marketplace. In contrast, this situation can be offset by the desirability and/or convenience of location. A prime example in the case of the Savopoulos mansion in Washington D.C. This was the site of a horrible murder in May 2015. Three family members of the Savopoulos, as well as their housekeeper, were tortured and killed after being held hostage for 19 hours. Additionally, a fire was set that damaged the house.

Before their killer set it afire, the home was worth about $4.5 million. But after the murders, the Savopoulos estate sold it for $3 million. In a sought-after neighborhood where the median home price is more than $7.5 million dollars, the buyer likely figures they make a profit. In April of 2017, the property was razed, likely to make way for a new home.

The Savopoulos murder house was the scene of the horrific quadruple killing. (Photo source: Washingtonian)

Adjustment approach considerations

The approach for identifying comparable properties, as well as the availability, is defined by the type of stigmatization. If you specialize in the area environmentally stigmatized properties, you will most likely find an array of published data. For example, levels of nitrogen and phosphorus cause environmental changes in the Chesapeake Bay and its tributaries. An annual publication, the State of the Bay, gives a comprehensive report of the Chesapeake Bay’s health. You can use that data, applying a paired-sales analysis for properties located on the bay’s various waterways, to make a case for a measurable adjustment.

The research needed to identify and derive an adjustment when appraising a murder/suicide property involves thinking outside the box and coming up with a method that is reasonable. Researching crime records, comparable areas, number of murders within a time period, and type of murder/suicide, and developing the framework for comparison and analysis requires extensive research and skill. Such a skill level is derived more from experience than analytical competence.

Sources of business and income

Just as appraisers specialize in niche markets, so do attorneys. Developing a relationship with the local bar association to target attorneys handling litigation for stigmatized properties is one way to grow your business. The affiliation with a law firm can lead to increased income, as making the transition to becoming an expert witness in stigmatized property cases would be a natural offshoot.

Stigmatized properties are the result of a situation. Therefore, opportunity lies in the event and the expansion of any niche market. For example, water-front appraising is a specialty. A waterfront property, becoming stigmatized by an environmental condition such as phosphorous run-off from development, opens the door to add the sub-category of “stigmatized water-front appraising ” to the existing specialty of water-front appraising.

Owners of properties that come under some form of stigmatization need pre-listing appraisals. A pre-listing appraisal of a stigmatized property can help to alleviate the fear of the unknown for a buyer, and demonstrate the seller’s due diligence as the owner of a property that comes under suspicion due to some emotional event that does not affect “the bricks and the sticks.”

Business can also be obtained from civil engineering firms, surveying companies, and some governmental agencies.

Wherever the business originates, the very nature of the job is going to require more research, resulting in a detailed report best addressed in narrative form. Whether you charge a flat fee, or one based on an hourly rate composed of a cost range, is up to you. No matter what your current specialty, the area of appraising stigmatized properties is worth exploring, as it offers a unique opportunity for business growth and career development.

Learn more about appraising stigmatized properties

Get insights on how to approach stigmatized properties with our complex property courses.

Article by Carole McCullough. Carole McCullough has been a Certified Residential Appraiser in the State of Maryland for over 25 years. She is the owner of ARC (Appraising and Real Estate Consulting) LLC. Her areas of specialization include waterfront, retrospective, historical, and oddball appraisals in narrative form. If you’d like to get in touch, email [email protected].

More than 200,000 real estate professionals got their start with McKissock. See what they are achieving.

Hear what they have to say.

See More Reviews