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Comments on "the effects of a defective construction lawsuit on the value of condominiums: a case study".

The article, "The Effects of a Defective Construction Lawsuit on the Value of Condominiums: A Case Study" (Fall 2005) by Steven E. Miller, SRA, was recently brought to my attention. While I appreciate that Mr. Miller correctly labels the valuation methodologies that I have authored as conventional appraisal approaches, I do take issue with the balance of his article.

Mr. Miller's article sets forth a construction defects case involving a condominium building. He then, using what he terms a Bell forecast, sets forth a time-value model that quantifies a drop in value, which later recovers over time.

Mr. Miller then tracks the actual performance of the market and overlays the data on top of the Bell forecast. He then demonstrates that the actual market performed differently than the Bell forecast.

This article is remarkable in many ways:

* First, I know nothing of this property, have never seen it and have never been retained in any way to perform any analysis of any kind. Accordingly, I am stunned that this quantitative analysis was labeled as a Bell forecast.

* Given the limited information set forth within the article, I would never have performed an analysis that Mr. Miller incorrectly calls a Bell forecast.

* The difference between the Bell forecast and the subsequent market overlay appears to be almost entirely a result of a major discrepancy between two contractors' repair estimates. One contractor has a very high estimate of repair, and the other one is very low. Observing that there is limited information in the article, and the lawsuit settlement amount, the lower estimate appears to be more reliable. Thus, Mr. Miller appears to have attempted to marry me in some way to the contractor with the high repair estimate, again in a case I know nothing about.

* The Bell Chart, which I authored over 15 years ago, does not purport to forecast anything. Indeed, I have repeatedly stated in my book, articles, seminars, and speeches, that there are no off-the-shelf solutions, and that market data is required in performing any analysis of detrimental conditions. This has always been conventional appraisal practice, and it is certainly my position.

* The Bell Chart sets forth numerous time-value alternatives for detrimental conditions, including one for no impact and one showing a premium. The only way to select the correct model or come to proper conclusion would be to properly research and analyze relevant market data.

* Most importantly, the Bell Chart does not quantify anything. Its purpose is to organize the hundreds of potential detrimental conditions into 10 categories; set forth the Detrimental Conditions (DC) Matrix, concepts that have since been incorporated into USPAP AO-9; and set forth a variety of potential time-value models. The Bell Chart itself emphasizes that any conclusions are ultimately the result of studying empirical market data.

While I appreciate Mr. Miller's efforts to study and discuss the impacts of detrimental conditions on real estate, I would like to set the record straight that I had nothing to do with what he labels as the Bell forecast, which erroneously sets forth conclusions that I never made and never would have made.

Randall Bell, MAI

Laguna Beach, California

Response to Comments on "The Effects of a Defective Construction Lawsuit on the Value of Condominiums: A Case Study"

Mr. Bell was not involved in this project, or this analysis, so I apologize to Mr. Bell it" he is under the impression that I suggested that he was personally involved in any way. Rather, the point of the article was that in generally accepted appraisal theory, there is frequently an association between costs of repair and diminishment of value. Mr. Bell has done more research and analysis in this area than any other professional that I am aware of.

I have seen the chart on page 20 of Real Estate Damages: Applied Economics and Detrimental Conditions cited in several expert reports claiming damages in lawsuits for cost of repairs, plus ongoing costs, plus market resistance (risk or stigma). This is the theory that I wished to address in my article; specifically, the impact on sale prices in this condominium complex that had an allegation of costs of repair equal to 25% of the average sale price. Using the Bell model, as explained on page 393 of my article, one would expect the average price in the complex to drop by at least 25% (not including ongoing expenses and risk).

My point is exactly the same as Mr. Bell's in his letter, bullet points 4 and 5, i.e., that market research needs to be done in this situation to see if there has been any impact on value in this case. As Mr. Bell has written on page 122 of his book, "In most jurisdictions, damages in a construction defect case are measured by either the cost of repair or the diminution of value."

In this case, I measured the diminution of value for this project by tracking sale prices in the project over a series of years, which could be described in his chart as Point B, where defects are discovered; point C, where repair costs are quantified; and point D, where funds are made available to repair the defects. I was not trying to imply that Mr. Bell's chart forecast the diminishment in value for this project, I was only responding to the legal complaint that the values in the project were diminished by this amount (plus risk).

I was simply following Mr. Bell's advice on that same page that, "The scope of the valuation expert is to analyze the market, focusing specifically on whether alleged construction issues impact the value or marketability of the property and to what extent. Simply deducting the repair cost from the baseline (undamaged) value is rarely appropriate without corroborating market data and does not provide an independent measure of damages" That is exactly what I did in this case study.

Steven E. Miller, SRA

Denver, Colorado
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Article Details
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Author:Bell, Randall
Publication:Appraisal Journal
Article Type:Letter to the editor
Date:Mar 22, 2009
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