Expert: liznarr - 11/3/2010

Question
QUESTION: Hello,

My father passed away over 2 years ago and died intestate. I have 5 other siblings. Three signed over their ownership in our fathers home. Two have not and are waiting for and demanding a huge payoff. The home was appraised at the time our father death at $47, 500, however the home and land are in need of some major repairs. Having obtained appraisals for the repairs that are needed, do the costs for these repairs get deducted from the the appraised price of $47,500?
Are these amounts deducted before establishing the amount to give to my two greedy siblings. These are the amounts that we are looking. The yard has major flooding issues and has a repair appraisal of $5,500, roof repair due to leakage at $4,500, fallen floor in the kitchen appraisal repair at $3,500, foundation crumbling due to water damage estimated $4,000 to repair, mold cleanup at $4,000, interior window leaks $3,000 and water issues due to old lead pipes at 3,000. There is also a possibility of lead paint being an issue as well. The home was built in 1979.
Having all of my repair appraisals in hand what is my next step?

ANSWER: Hi Alex,

Sorry you are having to deal with the age-old problem of “who-gets-how-much” after the death of a relative.  I have witnessed this issue more times than I care to remember.

Whether or not the repair amounts come into play in connection with the appraised value and should be deducted from the $47,000 amount will depend on “how” the property was appraised and any comments the appraiser may have noted on the appraisal.

If the appraiser did not note the condition of the property as needing repairs at the time of the appraisal and/or did not state that the appraised value of $47,000 indicated was “in as-is condition,” I would check back with him/her for clarification and ask for this in writing if necessary.

If the appraisal stated that the property appraised for $47,000 in AS-IS condition, then the value you would use as a basis for ESTATE PURPOSES would be $47,000.  Taking this a step further, if, for example, the property is then put on the market for sale in an open market, whatever the net amount is and which is received at a closing would be the amount split among you and your siblings.

From your writing, even though you did not state this specifically, I am guessing that possibly you want to keep the property yourself and buy out the two “holdout” siblings, and then make repairs before either moving into the house or leasing it out.  

If this is the case, you will need to come to an agreement with the two holdouts on the value they will accept because by a family member wanting to keep the property, it will not be exposed to and placed in an open market for a sale.  If you and the holdouts cannot reach an agreement, you may have to have a Hearing before a Judge to settle the issue.  If your father’s Estate has not yet been closed out, the hearing would be before a Probate Judge.

Most probate laws are clear that the value of real property is the value established at date of death, so you may need to get some legal advice if you want to keep this property yourself, since it would not be exposed to and sold in the open market with competition.  The $47,000 appraisal amount is the generally-accepted basis for estate purposes and does not guarantee that the property will bring this much at a sale (again, in the open market subject to competition with other similar properties offered for sale).

Additionally, a possible problem I see on the horizon for you is that if no one has lived in the property for two years, and/or no repairs have been made since the appraisal two years ago, the conditions existing two years ago and needing repair have possibly/probably worsened, thereby making a repair today more expensive.

You need to keep in mind, also, the fact that we are in a horrible real estate market now; and a property that was worth $47,000 two years ago, very possibly is NOT worth that much in today’s market.  Values overall in the many cities and states have declined, and most sellers are shocked when they find out that a property they purchased, say, four years ago, can be worth significantly less in today’s market than what they paid for it four years ago.

If the house was built in 1979, lead-based paint “should” not be a problem, because lead-based paint was taken off the market in 1978.  You might have a lead-based paint problem only if someone did painting at the property with lead-based paint purchased prior to 1978, but was used in 1978 or later to paint at the property.

If the property will be sold, you simply put it on the market and when it sells, give the two “holdouts” their share of the net amount received at closing.

If you are unable to come to an agreement with your holdout siblings, I would suggest that you contact an attorney and get legal advice or talk with the Probate Judge.

This is a complex issue with several different possible scenarios, so I hope my explanations above are helpful.  

Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth

---------- FOLLOW-UP ----------

QUESTION: Hello and thank you for your timely response.

I do have a follow up question. I had lived with my father in our home for almost 30 years and do live here now and plan to keep our home. I looked at the appraisal conducted two years ago and the appraisal given for 47,500.

In the comments section, the appraiser notes the severe drainage problems of the site and to refer to the attached addendum. I've noticed the appraisal box is checked "as is" with verbiage stating to see attached statement of limiting conditions. It goes on to say Insufficient data available to determine value by income approach. See attached addendum, which refers to minor repairs needed on the interior with no mention of the sunken floor in the kitchen which has made the kitchen exterior wall split from the foundation.(this split can be seen from outside examination).

Finally this addendum notes the flooding issue that we have, how to address it with it possibly costing between 4,500-5,500 to repair. There is no mention of crumbling foundation or the fact that flooding has compromised its structure or that flooding has made a storage unit originally attached to the house become detach, flood on the inside and move away from the house. We have photographs of our property after raining. It does not have to be a heavy rain to make our property flood. There were things the appraiser stated verbally and did not place in writing on our appraisal. Apparently we were taken advantage of and no doubt will have to have a more qualified and honest appraiser. In the attached addendum he noted the entry of water around the front door during rain but neglected to state the water that flows around the windows in the living room and bedrooms.

Thank you for your response.

Alex

Answer
Hi Alex,

As stated in my first response, an appraisal of real property is the basis (unless challenged) a person would most likely use for ESTATE purposes.  The real property (in this case your father’s home and land) might be only one of what could be many assets in a person’s estate.  All assets are then totaled to determine if, when all are combined, the total assets will add up to create a TAXABLE estate.  I am not up-to-date on what that amount is, but you can check with the IRS for the year in which your father passed away, or check with a CPA.  

Since the appraiser did note some of the repairs needed and problems existing on the $47,000 appraisal and stated as-is, that is HIS opinion of value as-is.  Appraisers, however, are not home inspectors and generally are not qualified to give exact estimates on all repairs needed and, again, an appraisal is no guarantee that a property will bring that amount.  An appraisal is simply an estimate of value by someone trained in that field.

The bottom line is that even though the appraisal came in at $47,000, there is no guarantee that a buyer in the open market would pay $47,000 – two years ago or now.  The appraisal done over two years ago would no longer be valid for a current-day sale since the appraisal is over 12 months old.

I would certainly think that most buyers would want to deduct the cost of repairs from any appraisal.  A buyer (whether it is you or someone else) not only has to make the repairs, but also take the time, trouble and inconvenience of having the repairs made.  Also, many times when one repair is made, it can be more costly to repair than originally anticipated because of hidden damage, and/or additional defects can be “uncovered” when making repairs.

Since you are interested in buying out your two holdout siblings, I would consider several things:

1.   Have a qualified, experienced real estate agent give you an opinion of current value, backing the opinion up by providing you with recent sales of comparable properties.  Also look at what comparable properties are currently offered for sale, as these would be competition for your father’s house.
2.   Having a new appraisal done.
3.   If you and your two siblings cannot reach an agreement, seek legal advice.  Compromise by all, however, might be best as expenses of a Court battle could be costly for all of you.

One final thought:  You could look into putting the property on the market and list it with a first-right-of-refusal, making sure that you are listed as an exception for the duration of the listing agreement.  This means that another buyer could look at the property and make an offer, but you (being the person holding the first right of refusal) would have the right to accept the offer, or decline it and move forward with a purchase on your own.

This method would expose the property to the open market and still protect you – so long as the proper listing paperwork had  been drawn up and signed by the proper parties and you know that you definitely have the first right-of-refusal and are also listed as an exception to the listing agreement.  You would probably want to have an attorney draw up a document for you.  It might also be difficult to find an agent willing to work with you this way unless you paid them a flat fee if you were to purchase the property.  It might, however, be worth looking into.

Finally, if an offer were to come in, it could be used as an indicator of what someone in the open market would be willing to pay for the property.  You would want to check with an attorney to determine if an offer were to come in and you refused it – would you then be obligated to move forward with a purchase.

As negotiating power with your siblings, you can explain that if the property were placed on the market for sale with a real estate agent, there would be a commission to be deducted from “any” listing and ultimate sales price and thus, less money for everyone.  Maybe you can convince them to land on planet Earth and also accept the fact that no one is likely to pay full appraisal price on ANY property these days and then make expensive repairs.  Just because, say, a $10,000 repair is made, that does not necessarily add $10,000 of value to the property; it simply corrects a defect.

Good luck to you, and please feel free to write again if you have additional questions.

Regards,
Elizabeth