Negative property value – 5 most common situations

It happens that the amount in the property appraisal report is preceded by a negative sign. This poses a problem for the owner or potential investor, as such “negative” properties are almost always a harbinger of significant troubles. An expert from a Warsaw consulting company, Lege Advisors, explains in which situations this happens and why.

According to the regulation of the Minister of Development and Technology regarding property valuation, it was predicted to include a negative number. Pursuant to §74 “When it is necessary to incur expenses to restore the property to a condition allowing for its use in accordance with its purpose, exceeding the value that the property would have if these expenses were not necessary, the value of the real estate may be expressed as a negative number. Expressing the value of the real estate as a negative number requires justification in the appraisal report.”

– From our experience, this provision is very broad, and the understanding of necessary expenditures is not limited only to removing anything from the property site. There are plenty of situations where at the very beginning of the valuation process you could with high probability expect zero value or even a negative one. These aren’t frequent situations, however they are quite typical. – says Magdalena Wiszniewska-Dwojak from Lege Advisors consulting company.

Interestingly, these situations are not reserved only for commercial properties, complicated or unconventional ones. They can also happen with the most ordinary residential premises or single-family buildings. So what has to happen for a several hundred square meter villa with a pool located on the outskirts of the city or an apartment in its center to be worth less than zero? We present five most common situations that contribute to such condition.

Situation no.1 Usufruct may reduce property value

The usufruct of the apartment grants a specific person the right to use a certain part of the property, which is not theirs. This is typically a solution applied in family situations, for example, when parents handover their apartment to children but retain the right to lifetime residence in that place. It happens that the value of usufruct is so high that it exceeds the property’s value. How is that possible? This can be directly derived from the methodology, which considers the potentially lost rental income and the period during which it is impossible to make profits due to the privilege holder’s habitation. Key in such situations is usufruct bestowed in favor of relatively young people whose predicted lifespan is several decades.

Situation no.2 Expensive clean-up

The second most common reason for significant property value reductions is related to soil pollution. The risk here applies primarily to properties intensively used currently or in the past for production purposes or waste storage. Unfortunately, when contamination is found and an official decision to remove the impurity has been made, the necessary costs to be borne will be very high from the outset. As a result … most polluted areas remain untouched.

-Remediation and reclamation are words that strike fear in the hearts of investors, because the process of restoring soils to their original state is neither easy, quick nor cheap. Of course, everything depends on the scale, degree and type of detected contamination and the necessary remedial actions. –explains Magdalena Wiszniewska-Dwojak from Lege Advisors consulting company.

Situation no. 3. Faulty building construction

A good and common example of significant property value reductions are the construction problems of a building causing, for example, chronic wetting of walls. This usually results in damp efflorescence on the walls, fungus in rooms and the creation of a microclimate threatening health. In most instances, expert reports command a radical reconstruction of the building, including roof replacement, insulations up to the foundations, chemical drying and fungus removal from the walls. Often the predicted costs of renovation and reconstruction, given other problems associated with such property, exceed its value.

Situation no. 4. Property with no division

Another situation causing problems with valuation and the property’s value itself is when we deal with unpartitioned and formally unseparated part of the building. If, additionally, the owner only has a share in that part of the building, troubles are certain. Such a situation is incorrect in the context of “real estate” law and civil law. From the point of property valuation, it is difficult to rationally define, for example, the subject and scope of the valuation.

– The blows are graver than just a problem with valuation. It is about very limited capabilities of circulation of the given property or even lack of them. The Polish legal system does not foresee the possibility of circulation of parts of lands or buildings without their prior division. –explains Magdalena Wiszniewska-Dwojak from Lege Advisors consulting company.

Situation no. 5. Unauthorized building development

An interesting case is the case of structures erected in accordance with the investor’s demand and imagination but without local government and oversight approval, the so-called unauthorized building development. There are still situations where the majority of the buildings belonging to a single, not small production plant were built without any permits or oversight. Despite the existence of the legalization procedures for “unauthorized developments”, it is not always possible and feasible for some illegal structures. The effect – the property valuation is conducted with the assumption of removing the development erected against the law. Thus, the property loses its most valuable asset in the form of existing buildings, which reflects in the final valuation of value.