Psychological loss of value

We all know the term "loss of value" from cars, where an appraiser can put a fairly precise figure on it. What does psychological loss of value mean for an apartment?

Picture yourself deciding whether to buy a nice apartment in a good, respectable town in Israel. Partway through, you learn the apartment had extensive dampness problems in the past. You ask the seller, and they tell you everything was treated and resolved.

Now ask yourself: does the apartment still feel the same to you? On paper its value has not changed, since the defects are gone and everything checks out. In practice, though, a questionable past can still put off a potential buyer and drag down the price.

Psychological loss of value is the compensation owed for that drop: the gap between what a property would fetch at market price and what it fetches once its history scares buyers away.

A real-estate appraiser calculates it from the home inspection engineer's construction defects report, as the difference between what the owner could have sold the property for before the serious defects came to light and its value once the story got out and a bad reputation started spreading among neighbors, brokers and sometimes even the media (see the collapsed balconies at the Gindi project in Hadera).

This applies to serious construction defects: recurring dampness, foundation settlement, a collapsed balcony and the like.

Even once these defects are repaired, doubt lingers about the property's renewed quality and how thoroughly the problem was fixed, and that doubt makes it harder to sell the property for the price it would have fetched without the story attached to it.