As Is, Subject To, or Deferred Maintenance?
by David Reed
Deferred Maintenance vs. Subject To. Live it, love it, learn it. These terms are sometimes bandied about without much thought when getting a property appraised. But knowing the difference between the two and how it can make or break your deal may be your biggest concern when reading an appraisal.
What is Deferred Maintenance? First, it just means that you put it off. You waited. You loitered in the laundry room of life. Maintenance? Taking care of something. Put the two together and it all makes sense. You put off taking care of something. And in real estate terms it also means that since required maintenance was neglected it’s affected the value of your property. Maintenance was deferred and you’re paying the bill.
Deferred Maintenance usually means something more than just a bad choice of carpet color or not enough storage in the garage. It means an old roof that is missing shingles and needs replacing. It means the electrical system doesn’t work. Or it could mean the existence of a bad foundation. It means bad stuff. Stuff that needs to be fixed before any real value can be placed on the property.
Okay, so what then? Let us say that you believe you might have some foundation problems due to some visible cracks both inside and outside of your home. You hire an engineer and sure enough, your foundation has settled in the wrong way and it will cost about $7,500 to fix. Many home sellers simply say, “okay, instead of fixing it, let’s just reduce the price by $7,500.” That might be okay for someone who is aware of the problem and who will pay cash for the property. But it won’t work for someone who will need financing. Lenders won’t lend on property with such deferred maintenance until it is fixed. Not before. Fix first. Fund second.
In this instance, you’ll have to fix the foundation before you close the deal. But what about “Subject To?” Didn’t your agent tell you to simply sell the property “as is?”
“Subject To” in an appraisal sense means that the property is worth “x” amount subject to certain things being done. Most often this term is used for new construction, that a house will be worth $100,000 subject to the house being finished as drawn. Or in the case of an existing home the term might be used to describe an improvement to be made that gives value to the property. An example of this might be “ . . . this house is worth $250,000 subject to the additional bedroom being completed.” A lender may then make a loan on the property subject to the additional bedroom being completed. Before the loan finally funds, the lender will send an appraiser that will say “yep, there’s a new bedroom alright.”
Property to be sold “as is” with items considered to be deferred maintenance runs into a roadblock if a buyer needs financing. Deferred maintenance must be fixed before any loan can be placed. Subject To items need to be completed in order to give the property full value. And simply selling something “as is” doesn’t’ mean that either of those terms can be ignored.
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