Wilcox Associates Case Study Background Information
Last week, James Wilcox, a real estate appraiser in West Palm Beach, Florida, received a call from Madera & Associates, a law firm in nearby Boca Raton, Florida. Madeline Madera explained that she represents a client who is seeking compensation after discovering urea formaldehyde (also known as urea-methanal) foam insulation (UFFI) in a recently purchased home. Ms. Madera needed an assessment of the impact of UFFI on property valuse to support their client in pending litigation.
UREA FORMALDEHYD FOAM INSULATION
Urea Formaldehyde Foam Insulation (UFFI) was a compound used in the 1960’s and 1970’s to improve the insulation quality of older homes. It was found that UFFI emitted the potentially hazardous formaldehyde gas as it decayed through time, and as a result the insulation fell out of favor with builders in the 1970s and, in fact, was permanently banned in Canada and Europe in the 1980s. Despite the ban, there remained considerable controversy concerning the health and financial risks of UFFI insulated homes – different independent studies reached conflicting conclusions about the health risks of UFFI homes, while various court cases provided no precedent for determining lost real estate value when such properties were sold without disclosure of UFFI presence.
REAL ESTATE VALUATIONS
When appraising real estate property value, James Wilcox generally uses a combination of three traditional methods plus an analytical method developed by him and his associates. The three traditional methods used are:
MADERA AND ASSOCIATES’S REQUEST
Ms. Madera's client had recently purchased a residential property in the Norwood section of West Palm Beach, an area with many older homes. While her client was generally happy with the property, she had not been informed of the presence of UFFI by the previous owner, or by the owner’s real estate agent. The client was not worried about potential health risks associated with UFFI, but believed she had overpaid for the property. Ms. Madera agreed with this claim for two reasons: 1) they were aware of the lingering negative stigma associated with UFFI homes, and 2) the decrease in sales value was the only reason UFFI presence would not be disclosed by the previous owner or sales agent. While they were willing to represent the client and were confident in the case, they needed demonstrable evidence of the value lost because of the non‐disclosure.
THE ANALYSIS
James informed Madeline that he believed he could supply them with an analysis and estimated valuation, as he had a database of residential home sales in Palm Beach County – both with and without UFFI – collected over the previous decade. The client’s UFFI litigation would begin in less than two weeks, so James must get to work immediately to generate his appraisal.
UREA FORMALDEHYD FOAM INSULATION
Urea Formaldehyde Foam Insulation (UFFI) was a compound used in the 1960’s and 1970’s to improve the insulation quality of older homes. It was found that UFFI emitted the potentially hazardous formaldehyde gas as it decayed through time, and as a result the insulation fell out of favor with builders in the 1970s and, in fact, was permanently banned in Canada and Europe in the 1980s. Despite the ban, there remained considerable controversy concerning the health and financial risks of UFFI insulated homes – different independent studies reached conflicting conclusions about the health risks of UFFI homes, while various court cases provided no precedent for determining lost real estate value when such properties were sold without disclosure of UFFI presence.
REAL ESTATE VALUATIONS
When appraising real estate property value, James Wilcox generally uses a combination of three traditional methods plus an analytical method developed by him and his associates. The three traditional methods used are:
- Replacement Value: Determine the value by estimating how much it would cost to build a similar building in a similar area.
- Net Rental Value: Determine the net present value of cash flows generated by renting the property.
- Market Value: Compare the property with similar properties in the area that were recently sold.
MADERA AND ASSOCIATES’S REQUEST
Ms. Madera's client had recently purchased a residential property in the Norwood section of West Palm Beach, an area with many older homes. While her client was generally happy with the property, she had not been informed of the presence of UFFI by the previous owner, or by the owner’s real estate agent. The client was not worried about potential health risks associated with UFFI, but believed she had overpaid for the property. Ms. Madera agreed with this claim for two reasons: 1) they were aware of the lingering negative stigma associated with UFFI homes, and 2) the decrease in sales value was the only reason UFFI presence would not be disclosed by the previous owner or sales agent. While they were willing to represent the client and were confident in the case, they needed demonstrable evidence of the value lost because of the non‐disclosure.
THE ANALYSIS
James informed Madeline that he believed he could supply them with an analysis and estimated valuation, as he had a database of residential home sales in Palm Beach County – both with and without UFFI – collected over the previous decade. The client’s UFFI litigation would begin in less than two weeks, so James must get to work immediately to generate his appraisal.
This case was derived from a case created by Dr. Ben Marcus while at Suffolk University, Boston, MA. It is fictional and does not endorse any particular analysis or real estate practices. It is for educational purposes only. Updates were made by Dr. Martin Schedlbauer when he taught at Suffolk University.