Each year, homeowners around the country endure catastrophic events such as floods, wildfires, hurricanes, tornadoes, and earthquakes. These events can be highly destructive to homes, especially when they occur suddenly. In the aftermath of a disaster, appraisers and assessors often find themselves in a number of situations that make it challenging to form an opinion of value. Understanding these challenges is an important step to helping mitigate risk.
When a disaster causes significant damage to a home, the homeowner may seek an appraisal to help support a diminution in value, giving the homeowner a temporary reduction in property taxes. States often recognize this when there is a “governor-declared disaster.” An “as is” opinion of value may be hard to quantify because the damage may impact the true market potential of the property.
Appraising a home that has been destroyed by a disaster can create several challenges. The home’s value may have to be recreated using historical property information. The true quality and condition may be undocumented or unknown prior to the disaster. Neighborhoods destroyed by wildfires, like those in California in 2017 and 2018, may not be able to adequately offer local sales comps.
Even if the home is intact, the surrounding community can influence the opinion of value. In some cases, the value may be negative because of the loss of lush landscapes and natural vegetation during the disaster. Depending on circumstances, the market may favor the sudden availability of new lots or of views that were previously unavailable.
Depending on the type of catastrophe, some may fear that hazards such as wildfires or floods may return in the near future, causing a stigma that can impact values and delay the rebuilding process.
Policies can use different methods to find the value of a home, which can cause the values to vary greatly from each other. Depending on the policy, an insurable value can be based on the total reconstruction of a home. This differs from an appraisal or assessment, which may be looking at the replacement cost of that same home. In other words, a reconstruction value captures all of the additive costs associated with rebuilding after a loss. This is the preferred methodology used by insurers to determine homeowner coverage limits. A replacement cost is defined as the cost to replace with a substitute of like or equal utility. This may not be focusing on the total exposure a homeowner may face after a fire or flood. Also, an appraisal or assessment often considers the land as part of the value, whereas an insurance appraisal may be for the structure only and/or other items specifically listed in the policy.
Today, lessons learned from natural disasters have led to improvements in technology that help appraisers and assessors overcome these challenges, allowing us to better mitigate risk. Using tools that identifying perils associated with a property is crucial. Knowing the risk of fires, flood and earthquakes can help support the true value of a property. These tools offer greater insights with metrics that go beyond what a standard appraisal may be looking at. If information is power, then having full disclosure of a property helps protect families and businesses from financial catastrophe.
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