One of the more interesting title claim subjects, which we as appraisers deal with, is that of restrictive covenants not having been excepted within the title policy.

The claim letter may go something like this. I purchased my single family home on 102 Oak Street last year having no idea that I would be liable for association dues and the restrictive covenants. Shortly after the closing I was presented with a bill for dues payable to a local homeowners association and also informed that I am unable to park my 1982 inoperable pickup in my driveway. The association dues are purportedly to cover services of the neighborhood such as street lights, street maintenance, association management, etc., which I expected to be covered by the city through my property taxes. My title policy does not list the restrictive covenants as an exception. I would never have bought here if I had known about the dues and the restrictions. In addition to my not being able to use my property as I intended, I am an emotional wreck over this. My attorney tells me that the title company has a duty to compensate me due to this error. My accountant says that he estimates my loss somewhere north of $100,000.

As with most title claims, property owners have a tendency to get emotional and to complain about far reaching issues that are not germane to the title insurance policy. While I am not an attorney, I have been advised by various title company counsels that generally, title claim damage, is restricted only to the loss in real estate value. We as appraisers would not typically address other issues such as what the claimant planned to do with the property or emotional distress. If any such damages are covered by a policy, this is typically handled by claims counsel outside that of the real estate appraisal.

In the above referenced case dealing with undisclosed restrictive covenants, appraisers are typically asked to provide the “Diminution in Value” (DIV) of the property, if any, resulting from the covenants. The appraiser will value the subject property as unimpaired, assuming it had no covenants and as impaired, considering the covenants. Finally a damage value will be determined representing the difference in the unimpaired and impaired values.

While each DIV case is different and there are typically multiple issues affecting value, we find that not all restrictive covenant cases result in damages. This can be explained by taking a look at all of the facets of the covenants. While there may be specific restrictions that a property owner objects to, the restrictions are there to protect the overall interest of the property owner. Such issues as not allowing junk cars in the driveway, is perceived by most to enhance property values. The dues charged by the association serve to enhance the quality of the community, whether it be for road maintenance, landscaping, community facilities, etc. While these services cost property owners money, they usually contribute to the value of the properties common to the association.

Another way to view covenants issues is to put one’s self in the position of the developer who imposed the covenants. This was done, given the developer’s vision of the covenants benefiting the properties and making them more valuable and marketable. Therefore, it is conceivable that the restrictive covenants can actually add value to properties within a development. We should not be surprised to find that in some cases the appraiser will actually demonstrate an equal or enhanced value given the advent of the neighborhood covenants. The benefit of the covenants may outweigh the burden caused by the declaration of restrictions.

It is acknowledged that there could be covenant related damage to a property given the specific and unique circumstances of a given case. The best way to find out how covenants affect property value is to obtain a professional appraisal. It is suggested that the appraiser be tasked with preparing a DIV Appraisal considering the effect of the covenants as a whole, rather than to strip out single issues. Including the holistic effect of the covenants, will permit the appraiser to give consideration to all of the benefits of the covenants, along with any negatives that they may contribute. This approach will usually be in keeping with the absence of the exclusion of the entirety of the association covenants within the title policy.